Philanthropic individuals can contribute a wide variety of assets to charity. In addition to the social good that comes with the contribution, there may also be a financial benefit to the donor through an income tax charitable deduction for the charitable gift. However, the one asset that is often overlooked when it comes to charitable contributions is life insurance.
Ways to Gift Life Insurance
There are generally 4 ways you can use life insurance as a charitable giving vehicle, including naming a charity as the beneficiary of your group term life insurance, naming a charity as the beneficiary of your individually owned life insurance, gifting an existing policy that you may no longer need to a charity, or regularly gifting enough money to a charity so that the charity can purchase insurance on your life and continue to make the premium payments over time.
Naming a Charity as the Beneficiary of Your Group Term Life Insurance
The first method of using group term insurance is probably the most overlooked. If you have employer-provided group term life insurance, the death benefit of that coverage may be a multiplied amount of your salary. If your company provides group term insurance in excess of $50,000, you are taxed on the value of the death benefit that exceeds $50,000.
If you name a charity as a beneficiary of your group term insurance for a full year, you will not be taxed that year on any of the group term insurance that exceeds $50,000. In future years, you can change your beneficiary designation (as long as you did not make an irrevocable beneficiary designation) if you choose, and doing so will not affect the tax savings that you already received.
Naming a Charity as the Beneficiary of Your Individually Owned Life Insurance
Another way to use life insurance as a charitable gift is to simply name a charity as the beneficiary of the death benefit in a policy that you own and have purchased yourself. If you are concerned that you need to provide for your loved ones first, you may prefer to name them as the primary beneficiaries, with the charity as a contingent or secondary beneficiary. This way, if your primary beneficiaries survive you, they will receive your policy's death benefit. However, if your primary beneficiaries predecease you, the charity, as the contingent beneficiary, would receive the insurance proceeds.
You can also name a charity as the primary beneficiary for a portion of the death benefit, with family members receiving the balance, so your loved ones are protected and the charity also benefits. Using the beneficiary designation in this fashion provides a great degree of flexibility, because you can change it at any time (as long as you did not make an irrevocable beneficiary designation). Although there are no income tax benefits with this strategy, there will be an estate tax benefit if the charity is a beneficiary of your policy at the time of your death.
Gifting an Existing Policy to Charity
If you have an existing permanent life insurance policy (whole life, universal life, or variable life) that is no longer required for your family's financial security, you might consider donating it to a charity. Examples of such insurance policies might include those purchased to cover an outstanding mortgage obligation that has now been paid, those that guarantee the cost of a child's college education that has since been funded, policies to protect a spouse or child for whom it is no longer necessary, or those that protect a business (or medical practice) that no longer exists or that no longer needs protection. In most cases, donors are often surprised that these surplus life insurance policies can result in significant income tax deductions.
If an existing "paid-up" policy is donated, the charity would be named as the owner and beneficiary of the policy. The donor would then receive an income tax deduction equal to the lesser of the cash value of the policy or the total premiums paid.
You can also donate a policy on which the premiums are still being paid. Again, the charity would be named as the owner and beneficiary of the policy. The donor member would then receive an income tax deduction equal to the cash value of the policy and for any future premiums subsequently paid.
Purchase a New Life Insurance Policy Naming the Charity as Owner and Beneficiary
This has become a very popular planned giving technique, because it allows donors to make a large future gift using current income as opposed to donating assets that might be needed to generate income, to provide for family members, or to support one's lifestyle during retirement.
This allows your designated charity to leverage a modest gift of cash into a much larger deferred benefit (the life insurance death benefit). Typically, the donor applies for a permanent (cash value) life insurance policy on his or her life and names the charity as the owner and as the beneficiary of the policy. Because the charity is the owner, the donor's annual gift of the premium payment is completely tax deductible. It is important to note that you need to check with your legal advisor before this method is used, because a few states have "insurable interest" laws that may not allow this strategy.
Insurable interest laws require that the person or organization applying for life insurance has an interest in the life (or death) of the person being insured to prevent people or organizations from speculating on the lives of strangers. However, most states recognize that charitable organizations have an insurable interest in the lives of their donors, particularly those who make contributions on a regular basis.
In addition to the altruistic and charitable motives for giving, there are some tax benefits to such giving. This article describes a variety of ways to use life insurance as a charitable vehicle. Of course, because everyone's situation is different, you should consult with your tax and/or legal advisor to determine if it makes sense to consider incorporating the use of life insurance as a charitable gift in your estate and/or financial plan.