Millions of Americans make donations of cash and property to the charities of their choice each year. However, while these donations can provide valuable tax deductions, many donors are left wishing that they could do more for the charities that they love and support. Some donors would therefore be wise to consider using their life insurance policies as a more effective means of leveraging the support they provide. In many cases, this can be the most effective and convenient asset that they can give. However, there are a few different ways that this can be done. This article examines the various methods of life insurance donations and their advantages.
Charitable Giving Riders
Charitable giving riders are a relatively new addition to the family of riders available in modern life insurance policies. For example, these riders can be attached to policies with face values of over $1 million and then pay an additional 1-2% of the policy's face value to a qualified charity of the policyholder's choice, although sometimes there are limitations placed on the maximum allowable gift amount. Furthermore, these riders usually come at no additional cost and often do not increase the premium or reduce the cash value or the death benefit of the policy. These riders effectively eliminate the need to create, pay for and administrate separate gift trusts until the death of the insured.
Once the rider has been added, no further action is needed by the policyholder. These riders do have a few limitations; perhaps the largest is the high amount of protection that must be purchased in order to use them. Any charity chosen must also be a qualified 501(c)3 charity that meets the IRS definition of a nonprofit organization. Furthermore, make sure that the charity will actually accept your life insurance policy. Some types of policies, such as term policies, are often shunned by these organizations.
Although this strategy is a bit more involved than merely purchasing a charitable gift rider, policy donations also provide a much greater benefit to the donor as well as the charity. Gifting a life insurance policy can greatly reduce the donor's taxable estate, which can save thousands of dollars in estate taxes for upper-income taxpayers. Gifting a policy can also yield a current income tax deduction of the policy's fair market value. Of course, this deduction can be quite significant in some cases. (To learn the basics of charitable giving, read Deducting Your Donations)
Perhaps most importantly, the charity will receive the entire face amount of the policy upon the death of the insured. This is usually going to be many times the amount that they would receive from any rider, and can represent a substantial windfall. However, the cost to the donor will only be a small fraction of that amount each year, and any premiums paid after the date of the gift will be deductible as well.
There is also no limit on the size of the policy that may be donated, since charitable donations have no ceiling for estate tax purposes. This strategy also does not impede the donor's current investment strategy, and can also provide a useful way to dispose of an unwanted policy that was originally purchase to cover a need that no longer exists.
Naming a Charity as Beneficiary
Naming the charity of your choice as the beneficiary of your life insurance policy is the simplest way to provide a charity with the death benefit proceeds from a policy, although it does not offer the income tax advantages that come with gifting a policy. However, it still reduces the donor's estate by the amount of the death benefit. Donors who are unsure of exactly how they want to apportion their assets after death can list a charity as a revocable beneficiary if they so choose. This gives them flexibility in future planning in case their financial situation changes.
Naming a charity as a beneficiary also ensures the privacy of the transaction, which can be important for donors who wish to keep their gifting intentions secret from their families or other heirs. Transfer of assets from an insurance contract is also absolutely incontestable, thus rendering anyone contesting the estate settlement powerless to stop it. Furthermore, the donor remains in a position to change the beneficiary prior to his or her death. If the donor chooses to stop paying the premiums, the charitable organization can choose to continue the process 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 to their life insurance policies in cash and donate them 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. Corporations can also effectively implement this strategy as a giving policy to realize tax and community benefits.
Donors who wish to leverage their cash donations to charity can use life insurance as an excellent means of accomplishing their goal. By either gifting a policy outright or naming a charity as beneficiary, they can provide the charity of their choice with a large sum of money that can provide a lasting legacy for a cause that they believe in. Donors should consider the use of charitable riders on their cash value insurance policies to provide at least a small gift if possible. For more information on the use of life insurance as a gifting tool, consult your insurance agent or financial advisor. (For further reading, check out Gifting Your Retirement Assets To Charity.)