Often when you hear a person asked what they want to do are asked about what they would do with lottery winnings, he or she mentions giving to a charity, school or hospital that is important to them.
When asked about retirement and estate planning, however, the same person may be reluctant to commit to a sizeable donation while balancing a retirement budget and an estate plan that leaves something for their families.
Donating a life insurance policy as a charitable gift can ensure you leave a legacy to a cause important to you, without detracting from what you leave for your loved ones.
And you can feel good about both the donation and the tax benefits it provides.
How it works
You can gift a whole life or permanent insurance policy, either by making the charity the owner and beneficiary of the policy or gifting the death benefit through your will. Each strategy has its own benefits and tax advantages provided the donation is made to a registered charity. In both circumstances, you are the insured person under the policy, you pay the insurance premiums and the death benefit goes to charity.
Gifting the policy
Either a new policy with you as the insured or an older policy already in force can be assigned to the charity of your choice. By assigning the policy to the charity, the charity becomes both the owner and beneficiary of the policy.
You continue to pay the policy premiums and those premiums are considered to be a donation, giving you an annual tax deduction.
Gifting the death benefit
When you remain the owner of the life insurance there is more flexibility in how you donate the proceeds of the policy. You can either name the charity the beneficiary, or name your estate the beneficiary and leave instructions in your will for donating the death benefit . Maintaining ownership allows you to change where the death benefit will go in the future if necessary or split it between two charities.
With this arrangement you do not benefit from tax deductions while paying the premiums. Instead, when the death benefit is donated your estate receives the deductions to offset any final estate taxes owed.
It is common for institutions and charitable organizations alike to have legacy programs in place for assisting potential donors. Work with your advisor or accountant to determine what strategy best suits your needs and goals.