Looking for the best rate and coverage for life insurance? Consider Sproutt.
If your family will no longer need financial assistance or support after your passing, you may want to consider donating your life insurance policy to charity. Our guide will help you learn more about the many ways to donate, tax implications and more.
Policy donations are an easy way to transfer the ownership of your entire life insurance policy to a charity while you are still alive. You must schedule a policy donation while you are still alive if you’d like to donate in this way.
These types of donations provide multiple benefits to both the donor and the charity. There is no limit on the size that may be donated, and it can greatly reduce the donor’s taxable estate. The charity will possibly receive the entire face value of the policy upon the death of the insured depending on the specifications of the policy.
Life Insurance Policies Available for Donation
While there are many types of life insurance policies, there are only 2 types of life insurance policies that you can donate to a charity: term life and permanent life. Term life is a policy in which you choose the length of coverage, usually between 1 and 30 years. If you die during this period, your beneficiary will receive the policy’s specified payout. If you outlive your policy, your policy expires, and your beneficiary does not receive a payment.
Permanent life policies, on the other hand, do not expire. No matter when you die, your beneficiaries will receive your policy’s payout. Permanent life insurance policies are significantly more expensive than term life insurance policies, which make them a less popular choice for purchasers.
Due to permanent life policies lasting your whole life (as long as you continue to pay premiums), donating this type of policy to a charity means that it will definitely make it to the charity, even if you live a long life. Premiums are the payments you pay to the life insurance company for the life insurance they provide. Term life policies are not as ideal for donation because they may expire while you are alive, meaning that $0 is donated when you die.
Life Insurance Charity for Selected Riders
Charitable giving riders are a feature you can choose to attach to your policy when you enroll, usually at no extra cost. These riders will direct a certain amount of coverage to take care of your family while directing a different, prespecified amount to a charity of your choice.
Policies with lower death benefits do not tend to qualify for the rider feature. However, anyone who takes out a permanent life insurance policy can use this rider feature as long as they meet the life insurance company’s requirements. Selecting a rider will give a bulk amount to your beneficiaries while ensuring your charity receives a decently sized donation. This allows you to ensure that your family or beneficiary is taken care of while ensuring that your life insurance is donated to a cause that’s important to you.
How to Donate Your Life Insurance
There are a few different ways you can donate your life insurance policy to a charity. Each insurance company has specific requirements for donations, so make sure you do your research when you select a policy. Let’s take a look at a few of the most common methods you can use to donate a life insurance policy to charity.
Take out a new policy in the name of the organization.
When you take out a life insurance policy on behalf of a charity, you apply for a new life insurance policy in the name of the charity that they wish to donate to. In this case, you, as the donor, will receive a charitable tax receipt equal to the cash value of the policy and any premiums you pay. This policy will be opened with the charity being named as the original policy owner and beneficiary.
Gift dividends from a life insurance policy.
If your life insurance policy is receiving dividends, you can donate them and claim tax deductions for your donations. You can donate your current year dividends or your pool dividends if they have been building up in the contract.
Dividends come from the insurance company's profits, so only certain policies, which are referred to as “participating policies,” pay dividends. However, dividends can vary from year to year so this may not be as beneficial to the charity as other donation methods can be.
Name the charity as a beneficiary of an existing policy.
The beneficiary of a life insurance policy is the person, people or organization that receives your policy’s death benefit if you die during the policy’s term. If you name the charity that you wish to donate to as your policy beneficiary, at the time of your death, the charity will receive the policy proceeds and your estate will receive the tax benefits.
Changing the beneficiary will create a new contract that will prevent others from contesting the gift after your death. It also gives you the freedom to change to a different beneficiary or add a second recipient at any point as you are still the owner of the policy.
Transfer ownership of an existing policy to the charity.
Transferring ownership of an existing policy is a good choice if your family no longer needs financial assistance. Transferring ownership of a policy to the charity of your choice will give the charity immediate and full control of the contract. If it’s a permanent life insurance policy, the charity could surrender the policy for an immediate cashout. If the charity chooses not to immediately cash out, it could receive a tax-free payout when you die.
If you choose to transfer ownership, you’ll receive a tax receipt for the cash value of the policy. Unless the charity takes them over, you will continue to pay premiums if you owe them, but you can take tax reductions of your premiums if you continue to pay for the policy each month.
Life Insurance Donations and Taxes
Donating your life insurance to a charity can create a large tax write-off. The IRS allows you to write off the market value of your policy or your cost basis for the policy when you donate your life insurance policy to a qualifying, registered charity. Market value usually includes the policy’s cash value without any premiums you’ve paid so far. Cost basis refers to the amount you’ve paid in premiums so far.
Though the IRS does usually impose annual restrictions on the amount of money that you can deduct from your taxable income in the form of charity donations each year, this limit may vary from year to year. Tax consequences may also vary depending on the method that you use to donate your policy and the type of policy you have.
Terms on the Policy to Make a Donation
There are a few components of an insurance contract that you need to understand before you consider donating your life insurance policy — or even before opening a policy at all. Here are 4 key terms that you need to know to understand your insurance policy.
- Insured: The insured is the person covered on the life insurance policy. When the insured dies during the policy term, a death benefit is paid out.
- Owner: The person who owns and controls the life insurance policy, the owner can make changes, adjust beneficiaries and more. In many cases, the owner and the insured are the same person.
- Payor: The payor is the person, company or trust that pays the life insurance policy’s monthly premiums.
- Beneficiary: The beneficiary receives the death benefit if and when it is paid out by the insurance company. The beneficiary of a policy can be a person, multiple people, a business or even a charity.
How Much Will the Charity Receive?
The amount of money that the charity will receive upon your death depends on the terms of the policy. If you make the charity the sole beneficiary of your policy, the charity will receive the full death benefit of your policy. You can also split your death benefit among multiple parties as long as you specify exactly how much money you want to go to each beneficiary.
Best Life Insurance Companies
Are you considering donating a life insurance policy to charity? Consider these insurance providers that make it exceptionally easy to donate your policy.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- Best For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Donating Your Life Insurance to Charity
Most men and women who open a life insurance policy want to ensure that their family members will be taken care of after their death. If you have family that you want to leave a death benefit to, consider choosing a life insurance policy with a higher death benefit. This will allow you to split your death benefit between your surviving family members and a charity of your choosing, often for only a few extra dollars per month.
Frequently Asked Questions
Are life insurance premiums tax-deductible if the beneficiary is a charity?
Naming a charity as your policy beneficiary means that you still own the policy and that you cannot claim a tax deduction for your premiums. You can, however, take an immediate tax deduction when you transfer ownership of your policy to a charity.
What amount is a policy owner able to deduct when he makes a charitable gift of a life insurance policy?
The maximum charitable deduction allowed each year is limited to 50% of your adjusted gross income for public charities and 30% for private charities. The actual amount you’ll be able to deduct will vary depending on the beneficiary and owner of your policy.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.
About Sarah Horvath
Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.