How to Set Up Charitable Contributions Using Life Insurance

Throughout your life, it is likely that you’ve come to be involved with various groups or organizations – some of which may be in need of donations or financial support in order to keep them running.

While making donations of money during life is always a proper gesture, in many cases, doing so through life insurance can allow you to multiply the amount of your support for pennies on the dollar.

There are actually several ways that you can use life insurance for shifting funds over to a charitable organization – and in doing so, you and / or your estate could also reap tax benefits as well. Techniques for doing so can include:

Naming the Charity as the Policy Beneficiary

One way to provide a nice financial benefit to a charity (or charities) of your choice, as well as to gain tax advantages, is to name the organization as the beneficiary of your life insurance policy. This can also prove to be a very affordable and effective way of donating much more money than you otherwise may be able to by contributing directly out-of-pocket.

When a policy holder names a charity as their policy beneficiary, they simply pay the regular premiums on the policy. Then, upon the insured’s death, the policy’s proceeds will be passed on to the organization as a charitable gift. Because the death benefits that are paid out to charity is not subject to taxation, the organization will receive the full amount of the policy’s proceeds for using in any way that they see fit.

On top of the benefits received by the charity, you will be allowed a tax advantage by being able to deduct the policy’s premium payments as an itemized deduction on your annual tax return.

To set this strategy in place, it will be necessary to sign over the rights to the life insurance policy to the charity. Here, you will be required to give up the option to make any changes to the policy without consent of the charity. And, should you cease to make premiums on the policy, it runs the risk of being cancelled.

Assigning the Policy Dividends to the Charity

Another method of making a donation to a charitable organization is to allocate any dividends that are paid by your life insurance policy to the charity of your choice. This can be done by making the designation to do so on your life insurance policy application.

Here, in addition to the financial benefit that will be received by the charity, you will also be allowed to take a deduction on your annual tax return each year as these dividends are paid out from the insurance policy.

Adding a Rider to Your Policy

Adding a rider to your life insurance policy is another way of using your coverage to help a charity financially. Generally, these types of riders are allowed to be added to life insurance policies that are at least $1 million in face amount.

Typically, a policy that has what is known as a “charitable giving rider” will pay out the proceeds to one or more named beneficiaries. Then it will pay out an additional 1-2% of the death benefit amount to the chosen charity.

While there are certain limits that may be placed on these riders, they can be quite convenient as they can allow you to forgo having to purchase a separate life insurance policy just for the purpose of donating it to the charity.

What to Consider When Making a Donation With Life Insurance

When using life insurance as a mechanism for donating to a charity, there are several factors to consider prior to moving forward. First, it is typically best to use a permanent form of coverage. This way, the policy will not expire – provided that the premium continues to be paid.

Also, it is important that the charity you choose to receive the insurance proceeds meets the IRS definition of a 501(c)3 non-profit organization. If not, you may not be able to move forward with your donation – at least in the tax-advantaged manner that you have intended to.

For additional information on donating to your favorite charity using life insurance, contact us. We work with more than 40 life insurance carriers – and we can help you to find the best plan to use for your specific needs.