Life insurance does more than protect families from the financial costs of a breadwinner’s untimely death. It can also help individuals make a substantial bequest to a favorite charitable organization and possibly enjoy a tax break as well.
There are several ways life insurance can help you make a donation to a cause you believe in:
- Name the charity as the beneficiary of a life insurance policy you already own or buy for this purpose. Instead of giving several hundred or a thousand dollars to your charity annually over the years, investing that money in life insurance premiums can guarantee a sizable donation, even if you should die prematurely. Your charity will receive a guaranteed contribution—the policy’s death benefit—upon your demise. And since some life insurance policies offer a waiver of premium if you become disabled before age 65, you can guarantee this donation no matter what your health situation later in life.Name the charity as the primary beneficiary if you want the death benefit to go to it first. If you want a family member to receive the death benefit and the charity to receive it only if your primary beneficiary dies before you do, name the charity as the contingent beneficiary.
Tax consequences: If you retain ownership of the policy, you receive no income tax deduction for the policy’s current value or any premium payments you make. However, you retain control over the policy in this way and can change the beneficiary should your situation change.
- Apply for life insurance that the charity owns. Many larger nonprofits have “planned giving” programs that assist donors in doing this. Instead of paying premiums to an insurer, you make a donation to the nonprofit to cover the premiums. This approach provides benefits to both the charity and the donor. According to the National Committee on Planned Giving, “If the charity provides the initial funding and is the owner of the policy, it may have the right to collect cash dividends, borrow against the policy, and make partial or complete surrenders of the policy.”
Tax consequences: If you make an annual contribution to the charity for the amount of policy premiums, you can receive a charitable deduction for these amounts.
- Donate a life insurance policy to the charity. The simplest and most straightforward way to use life insurance in charitable giving is to donate a policy to the charity. Let’s say you bought a permanent life policy years ago when your children were young. Your children are grown and independent and the policy has built some cash value. You can donate the policy to the charity of your choice, which can then either tap into the cash value as either a policy withdrawal or loan, or it can wait to obtain the full death benefit.
Tax consequences: You might be able to deduct either the premiums you paid or the replacement value of the policy, whichever is less, from your income taxes as a charitable donation. However, some states do not consider a nonprofit to have an insurable interest on a donor’s life. Consult a tax professional for more information.
- Make the charity of your choice the beneficiary of any of your tax-qualified accounts, such as pensions, 401(k)s and IRAs. If your heirs inherit these accounts, they will have to pay income taxes on any funds withdrawn from the account—and if your total estate is large enough, the estate might have to pay estate taxes, reducing the usable balances even more. But a qualified nonprofit organization can avoid estate and income taxes. To make up the difference in what your family members would have otherwise inherited, you can purchase a life insurance policy, naming them as beneficiaries. They will receive the policy’s death benefit outside the estate, and not be subject to income taxation.
Tax consequences: No immediate tax benefits to you, but this method can prevent taxes from eating up assets your heirs receive.
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