A charitable gift of life insurance is a way of donating to a charity in which you buy a life insurance policy and name a registered charity as the beneficiary. You pay the premiums and then one or more charitable organizations receives the death benefit.
- Charitable gift of life insurance is a form of philanthropy in which a charity is listed as the beneficiary on a life insurance policy.
- The policyholder pays the premiums on the policy and the charity receives the death benefit.
- An insurance policy can allow the policyholder to change the beneficiary prior to their death.
- A death benefit that is made as a charitable donation can be excluded from a taxable estate.
How Charitable Gift of Life Insurance Works
Making a charitable gift of life insurance can help you achieve financial goals of contributing to a charity as part of your estate plan after your die. To make a charitable gift in this way, you purchase a life insurance policy and then name a qualified charity to receive the benefit. The beneficiary or beneficiaries must be a qualified 501(c)(3) charity and meet the Internal Revenue Service (IRS) definition of a nonprofit organization.
One key benefit of contributing a death benefit to a charity is that the benefit is excluded from a taxable estate. However, while other types of charitable donations can be deducted from your taxes if you itemize, if you donate your death benefit, there is no tax deduction for the premiums you paid each year prior to your death.
A charitable gift using life insurance policies can make the donor's intentions clear, and reduce the risk of legal disputes among the donor's surviving family members.
A charitable gift of life insurance can be made to multiple beneficiaries in one policy. A policy can include provisions that the identity of the donor or beneficiaries remain anonymous, which can reduce the risk of probate disputes.
Depending on the terms of the insurance contract, the donor may or may not have the right to change the beneficiary of the life insurance policy prior to their death. Generally, the donor can change the designated beneficiary, such as if their financial situation or priorities change. However, with irrevocable life insurance trusts, the beneficiary typically cannot be changed.
Charitable Giving Riders
You can also use a charitable giving rider instead of naming a charity as a main beneficiary. A rider is an insurance policy provision that adds benefits or amends the terms of a life insurance policy.
The rider can instruct the insurer to pay a specific percentage of the policy's face value to a qualified charity. There may be limitations on the allowable gift amount. A rider effectively eliminates the need to create, pay for, and administer separate gift trusts.
You can typically add a charitable giving rider to a life insurance policy for no additional cost. They do not reduce the cash value or the death benefit of the policy.
Example of Charitable Gift of Life Insurance
Say you are considering various options to support the American Red Cross and Goodwill Industries. Aside from donating directly to those organizations, you can buy a life insurance policy and list them as beneficiaries. So, you buy a whole life insurance policy with a death benefit of $300,000, which you request to be divided equally between the two organizations.
You would then pay the premiums on the life insurance policy. When you die, the insurance company would pay a benefit of $150,000 to the American Red Cross and $150,000 to Goodwill Industries.
The premiums paid on the policy would not be tax-deductible, but the death benefit is not taxable. Charitable gifts of life insurance can reduce the risk of probate disputes.
What Is the Tax Deduction for a Gift of Life Insurance?
A charitable gift of life insurance can be excluded from the policyholder's taxable estate. However, although the donation is excluded, the premium payments made during the policyholder's life are not tax deductible.
Can You Change the Beneficiary When You Make a Charitable Gift of Life Insurance?
You can usually change the beneficiary of a life insurance policy from a qualified charitable organization to another beneficiary such as a family member. You can review and update your beneficiary designation by contacting your insurance company.
Can Family Contest a Life Insurance Beneficiary?
Someone can contest the beneficiary of a life insurance policy if they believe they have a valid legal claim to the benefit. They will generally hire an attorney and they must notify the insurance company of the dispute.
The Bottom Line
A charitable gift of life insurance can be a way to make a substantial donation to a charity as part of your estate plan. Consider consulting a professional financial advisor for guidance on how you may include a charitable gift of life insurance in your long-term financial plan.