Millions of Americans make donations of cash and property to the charities of their choice each year. However, many donors are left wishing that they could do more for the charities that they love and support. Life Insurance can be an effective and convenient asset to give. This article examines the various methods of life insurance donations and their advantages.
Charitable Giving Riders on Life Insurance
Charitable giving riders are a relatively new addition to the family of riders available in modern life insurance policies. For example, these riders, which can be attached to policies with face values over $1 million, pay 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. These riders usually come at no additional cost and often do not 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 being the high amount of protection that must be purchased to use them. Any charity chosen must be a qualified 501(c)3 charity that meets the IRS definition of a nonprofit organization. Make sure the charity you wish to support will 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 and 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, which can be quite significant in some cases. (For related reading, see: 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 much mor than they would receive from any rider and can represent a substantial windfall. The cost to the donor is the premium paid on the policy, 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 does not impede the donor's current investment strategy, and can provide a useful way to dispose of an unwanted policy originally purchased 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. It doesn't offer the income tax advantages that come with gifting a policy, but it still reduces the donor's estate by the amount of the death benefit. Donors who aren't completely sure how they want to distribute their assets after death can list a charity as a revocable beneficiary. This gives them flexibility in case their financial situation changes. 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.
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 cannot be contested, making it impossible for anyone to stop the donation from occurring.
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.
The Bottom Line
Donors who wish to leverage their cash donations to charity can use life insurance to accomplish 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 and provide a lasting legacy for a cause 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, see: Gifting Your Retirement Assets To Charity.)