Can you donate your life insurance policy to charity?
People buy life insurance for lots of reasons: to replace their income, to ensure proper retirement planning, to protect loved ones financially, or to cover final expenses and leftover debt. In some cases, your goal may be to leave a legacy for a cause you believe in. Whether you’re buying a term life insurance policy or interested in permanent life insurance, you’re actually able to donate your life insurance policy to charitable causes in many cases.
Donating your life insurance policy to charity can be a great way to support a nonprofit you’re passionate about and take advantage of tax benefits. A recent Charitable Giving In The USA Report found that over half of Americans give to charity, making donations of over $1 billion a day in 2018.
If you’re interested in donating a life insurance policy, here’s how to make a gift that benefits you and your chosen cause.
How can life insurance be used as a charitable gift?
There are a few options if you’re interested in giving your life insurance proceeds to a favorite charity:
Policy Donations
A policy donation means permanently transferring the ownership of your entire policy – typically a permanent life insurance policy – to a charity while you’re alive. The charity you transfer it to would receive the policy’s death benefit, or its cash value, once you pass away.
Keep in mind that you would still need to pay any premiums owed and that the charity you choose would be responsible for managing the policy.
Policy donations can significantly reduce your taxable estate, or the total amount of taxable assets you own when you die. You can also deduct any premiums you pay after gifting the policy and can even claim a tax deduction for part of the donated policy’s value as a charitable gift, usually up to 50% of your adjusted gross income.
To ensure that this is an option and that you get the best tax deductions, make sure the organization you have in mind is a certified 501(c)3 and able to accept your policy as a donation. A financial advisor can help you understand how this might work for you.
Naming a Charity as a Beneficiary
Another more flexible option for donating a life insurance policy is to name the organization as a beneficiary. Unlike a policy donation, this is a decision you can change if you need to.
It’s also flexible in another way. If you want to leave a legacy for family members as well as a favorite charity, you can name multiple beneficiaries. This allows you to split the gift several different ways, and you can even choose the exact amounts that would go to each one.
Though it’s simpler than donating your entire policy, naming a charity as a beneficiary doesn’t come with the same tax advantages. That said, you can still reduce the amount of your taxable assets by donating some or all of your death benefit. This option also keeps your transaction private, so others can’t see who benefits from the cash payout, and unlike money from a will, your decision can’t be contested. Make sure to consult with your tax advisor about your options.
We’re here to help
Interested in permanent life insurance or term life insurance, and want to learn more about your options for donating a life insurance policy? At eFinancial, we can answer your coverage questions and help you find the right solution. Get in touch with us today.
At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.