Charitable Gift Life Insurance
Charitable Gift Life Insurance refers to a life insurance policy where the beneficiary is a registered charity. The donor typically either gifts the policy to a qualified charitable organization who is named as the beneficiary of the policy, or pays the premiums on a life insurance policy with the intention that proceeds from the policy will be paid to one or more charitable organizations upon the donor's death. The beneficiary or beneficiaries chosen must be a qualified 501(c )3 public charity that meets the Internal Revenue Service (IRS) definition of a nonprofit organization.
Life insurance can be an effective tool in a philanthropic plan. Each method described below has unique advantages.
Donating Your Policy
If a donor chooses to give away a policy, they can deduct the gift from their taxable income the year the gift is made. They cannot deduct the face value. They may only deduct the market value or cost basis of the policy, If the donor continues to pay the premiums, rather than having the charity pay the premiums, they can deduct the donated policy’s future premiums in the years they pay the premiums. If the donor chooses to stop paying the premiums, the charitable organization can choose to continue to pay the premiums or can allow the policy to lapse. At death, the charity would receive the entire face value of the policy.
Charitable Giving Riders
Charitable Giving Riders are a way for donors to donate some of their total death benefit from a life insurance policy to a charity of their choice. It is a newer type of rider available on modern life insurance plans. If this feature is added to a policy (typically available for policies with a face value over $1,000,000), a percentage of the policy face value will be gifted to a qualified charity that the donor chooses. In some cases, life insurance companies put a limit on the maximum gift amount that can provided to charity.
Naming a Charity as Beneficiary
Naming the charity of choice as the beneficiary of a life insurance policy is the simplest way to provide a charity with the death benefit proceeds from a policy. It does not offer the income tax advantages that come with gifting a policy, but it could reduce the donor's estate by the amount of the death benefit (in some cases). Donors simply list a charity as a revocable beneficiary. This gives them flexibility to change the beneficiary if their financial situation changes. If the donor chooses to stop paying the premiums, the charitable organization can choose to continue to pay the premiums or can allow the policy to lapse.
Gifting Policy Dividends
Although gifting policy dividends will not provide the same amount of benefit to a charity as the other strategies discussed, it is possible for policyholders to receive the dividends paid from their life insurance policies in cash and donate that cash to charity. The dividends donated are deductible in the same manner as premiums paid on a gifted policy, and this strategy does not require any additional cash outlay from the donor.
Leveraging Life Insurance for Charitable Giving
Charitable gift life insurance can be a convenient vehicle for philanthropy for several reasons.
Conclusion and Additional Thoughts
There are certain policies that lend themselves better to charitable giving. For example, a term life policy may not be the ideal choice because it can potentially expire before the donor dies. Permanent policies such as whole life or universal life do not carry an expiration date as long as premiums are paid and could better ensure a payout is made to charity. Also, keep in mind that there is no ceiling for estate tax purposes, which means there is no limit on the size of the policy that you can take out and donate to a charity.
Donors who wish to leverage their cash gifts to charity in their estate and philanthropic planning can use life insurance to accomplish their goals. By either gifting a policy outright, naming a charity as beneficiary, or gifting life insurance policy dividends to charity, donors can leave a significant gift to the charity of their choice and provide a legacy for an organization and a cause they believe in.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Life insurance can be an effective tool in a philanthropic plan. Each method described below has unique advantages.
Donating Your Policy
If a donor chooses to give away a policy, they can deduct the gift from their taxable income the year the gift is made. They cannot deduct the face value. They may only deduct the market value or cost basis of the policy, If the donor continues to pay the premiums, rather than having the charity pay the premiums, they can deduct the donated policy’s future premiums in the years they pay the premiums. If the donor chooses to stop paying the premiums, the charitable organization can choose to continue to pay the premiums or can allow the policy to lapse. At death, the charity would receive the entire face value of the policy.
Charitable Giving Riders
Charitable Giving Riders are a way for donors to donate some of their total death benefit from a life insurance policy to a charity of their choice. It is a newer type of rider available on modern life insurance plans. If this feature is added to a policy (typically available for policies with a face value over $1,000,000), a percentage of the policy face value will be gifted to a qualified charity that the donor chooses. In some cases, life insurance companies put a limit on the maximum gift amount that can provided to charity.
Naming a Charity as Beneficiary
Naming the charity of choice as the beneficiary of a life insurance policy is the simplest way to provide a charity with the death benefit proceeds from a policy. It does not offer the income tax advantages that come with gifting a policy, but it could reduce the donor's estate by the amount of the death benefit (in some cases). Donors simply list a charity as a revocable beneficiary. This gives them flexibility to change the beneficiary if their financial situation changes. If the donor chooses to stop paying the premiums, the charitable organization can choose to continue to pay the premiums or can allow the policy to lapse.
Gifting Policy Dividends
Although gifting policy dividends will not provide the same amount of benefit to a charity as the other strategies discussed, it is possible for policyholders to receive the dividends paid from their life insurance policies in cash and donate that cash to charity. The dividends donated are deductible in the same manner as premiums paid on a gifted policy, and this strategy does not require any additional cash outlay from the donor.
Leveraging Life Insurance for Charitable Giving
Charitable gift life insurance can be a convenient vehicle for philanthropy for several reasons.
- Reason #1: The death paid upon the donor's death is excludable from their taxable estate. However, keep in mind that the donor does not receive a tax deduction for the premiums paid each year unless the policy is gifted to the charity.
- Reason #2: These policies can also be helpful in making it absolutely clear where the donor wishes to donate their funds. After all, listing a charity as the beneficiary of a life insurance contract eliminates any ambiguity as to how the donor intended their money to be used. In this manner, charitable gift life insurance can help reduce the risk of legal claims from creditors or dispute from family members.
- Reason #3: Policies that are retained by the donors (as opposed to those gifted to a charity) can be structured to include multiple beneficiaries and can be written to ensure the identity of the donor or beneficiaries are anonymous, even after the donor's death. This can also help avoid probate disputes.
- Reason #4: Depending on the details of the insurance contract, the donor typically retains the right to change the beneficiary of the life insurance policy prior to their death (when the policy is retained by the donor). By listing a as the policy's revocable beneficiary, the donor can enjoy the flexibility of changing their mind if their financial situation changes.
- Reason #5: If the policy has a cash value, the donor has the flexibility of withdrawing cash from their policies or even borrowing against the equity in their insurance contract. These activities would, of course, reduce the amount of money available to the charitable beneficiary upon the donor's death. Of course, if the policy was gifted to a charity, the donor relinquishes these rights to the charity.
Conclusion and Additional Thoughts
There are certain policies that lend themselves better to charitable giving. For example, a term life policy may not be the ideal choice because it can potentially expire before the donor dies. Permanent policies such as whole life or universal life do not carry an expiration date as long as premiums are paid and could better ensure a payout is made to charity. Also, keep in mind that there is no ceiling for estate tax purposes, which means there is no limit on the size of the policy that you can take out and donate to a charity.
Donors who wish to leverage their cash gifts to charity in their estate and philanthropic planning can use life insurance to accomplish their goals. By either gifting a policy outright, naming a charity as beneficiary, or gifting life insurance policy dividends to charity, donors can leave a significant gift to the charity of their choice and provide a legacy for an organization and a cause they believe in.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.