If you’re looking to make a sizable contribution to charity, life insurance may not be the first thing that comes to mind. But this often-overlooked option can have considerable advantages for both the donor and the charity. If you no longer want or need your permanent life insurance death benefit, donating your policy can be an easy way to give that doesn’t require a large sum of cash.
Here are a few things to know about donating your life insurance to charity.
OPTIONS FOR DONATING YOUR POLICY
With many life insurance companies, donating a policy isn’t an all-or-nothing decision, meaning you can decide how much you want to give. Most allow you to divide your life insurance into two policies so you can give a portion to charity while still retaining the rest for yourself and your beneficiaries.
Once you have decided how much you want to donate, the next step is determining how much control you want the charity to have.
Make the charity the owner and beneficiary for the policy. This route gives the charity full control of the life insurance policy and total flexibility for what it chooses to do with it. The charity could decide to surrender the policy and take the accumulated cash value, or it could continue to pay the premiums (if they’re still owed). This would keep the policy intact and allow the cash value to grow. The charity could then access the cash value in the future or wait and use the proceeds from the death benefit.
When you make a charity the owner and beneficiary of your life insurance policy, you may be able to take a tax write-off for the amount of money you paid into the policy or for fair market value of the policy (whichever is less). This can be particularly helpful if you need to offset a large tax bill in a given year.
Make the charity the beneficiary of the policy. With this option, you retain control of your life insurance policy, and the charity will get the proceeds from the death benefit after you pass away. In this case, the charity is not able to access the cash value and cannot decide to surrender the policy while you’re alive. This gives you the option of making changes to the policy in the future or assigning the death benefit to a different beneficiary.
When you decide to go this route, you cannot take a tax write-off for the donation. When you leave a legacy through a death benefit, tell the charity your plans to leave it money and also provide instructions for how you’d like your donation to be used.
WHEN YOU’RE READY TO MAKE A DONATION
Once you’re ready to make a donation, it’s a good idea to speak with your financial advisor as well as your accountant or tax advisor. They can help you understand the best options for donating your life insurance to charity and help you fill out the necessary paperwork.