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Life insurance can be a charitable gift worth giving

By Jeanne Lauf Walpole on October 2nd, 2010

Life Insurance

Life insurance may not be the first thing that comes to mind when you think about charitable giving. If you've made charitable donations in the past, chances are those gifts came in the form of cash or an appreciated asset such as mutual funds, stocks or a piece of real estate. However, life insurance can be a beneficial way for you to meet your planned giving goals. A cost-effective and tax-advantaged charitable gift, life insurance can be a beneficial way for you to leave a legacy for your favorite charity.

Donate your life insurance policy

There are several ways that life insurance can be used in a charitable giving strategy, but one of the most beneficial methods is policy donation. A new policy purchased specifically for gifting or an existing policy can be used. However, in order to gift a policy, regardless of whether it is a new or existing policy, the charity must become the owner and beneficiary of your life insurance policy.

Policy gifting is advantageous to the charity because the organization stands to receive a substantial gift. According to Estate Planning, charitable donations aren't limited for estate tax purposes so there isn't a dollar limit to the policy that you leave behind.

In addition to the windfall the charity stands to receive, you get several benefits:

  • An immediate charitable income tax deduction of your life insurance policy's fair market value
  • The gift reduces the value of your taxable estate
  • The cost of the policy is often a fraction of the actual benefit that you provide to the charitable organization
  • Any premiums paid after the gift is made are tax-deductible

While a policy gift has many advantages, you should be absolutely certain that you want to leave the legacy to a particular charity before the policy is officially given. Policy donations are irrevocable, meaning that the policy cannot be taken back.

Make your favorite charity the life insurance beneficiary

Another way you can provide a substantial gift to a non-profit organization is to name a charity as the primary or contingent beneficiary of your life insurance policy. Unlike a policy gift, this gifting strategy offers more flexibility because you can change your beneficiaries any time prior to your death.

Keep in mind that naming a charity as a beneficiary doesn't provide the same charitable income tax benefits as gifting a policy. However, it does reduce your taxable estate by the amount of the death benefit.

Other ways to use your life insurance policy for charitable giving

Although giving your entire life insurance policy may provide the greatest gift to a charity, there are other ways to use a new or existing life insurance policy to support a charity:

  • Charitable giving riders: Providing a donation through a charitable gifting rider can be an easy way to provide a legacy to an organization. Charitable gifting riders can be added to life insurance policies with face values (the insurance benefit stated on the policy) of $1 million or more. According to Forbes, these riders typically do not increase premiums or reduce death benefits and can pay an additional one to two percent of the policy's face value to the charitable organization. Although beneficial in many ways, some may consider the rider to be somewhat limiting because of the large face value requirement, as well as the need for the organization to be a 501(c)3.
  • Policy dividends: Rather than collecting your whole life insurance dividends as cash, or to build cash value or pay up a life policy, you could donate your dividends to charity. Life insurance dividends that are given to a charity as a donation are income tax deductible, and this gifting strategy does not require any additional cash output.

What types of life insurance should you use?

If you are interested in exploring life insurance in charitable giving, Jim Allen, director of MetLife Wealth and Advisory Group, says that permanent life insurance policies, such as whole life and universal life, present the best choices. Because term life policies may expire before death and variable life policies don't have a guaranteed face value, they don't offer the reliance needed for long-term charitable giving. "Most people want the certainty of a permanent life policy," Allen explains. The permanence of whole life and universal life, as well as their cash value accounts, offer the reliability and flexibility needed for planned giving.

Consult a tax professional

Regardless of how you use your life insurance to support your favorite non-profit, be sure to ask your tax professional about the income tax implications of your possible life insurance gift.

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