Jason Fisher Thinking about charitable giving with life insurance, but not exactly sure how it works?
While it may not be the first idea which came to mind, a life insurance policy provides an excellent opportunity for donating to charitable causes offering benefits for both the charity and the donor.
As you plan your future, especially your estate, it’s a worthwhile consideration if you want to leave a charitable donation, in any amount.
It begins with an analysis of the donor’s current financial situation as well as plans at his or her passing.
Several options exist for charitable giving, each with their pros and cons.
Charitable Giving With Life Insurance: Is It Efficient?
Naming a favorite charity as a beneficiary offers an easy and direct way to ensure a legacy.
The primary advantage is the donor stays in control of the monies.
If the financial situation changes, the donor can adjust his plans accordingly. It is an especially simple solution if there is a single entity.
An individual can use a life insurance policy as supplemental coverage in the meantime, should they require it.
It offers additional benefits after the donor’s passing.
The transfer of funds is a private transaction giving the donor peace of mind.
It is also incontestable, so there will be no question regarding fulfillment of the donor’s wishes. The gift will occur regardless of any legal action taken against the estate.
In some situations, this is an essential consideration.
However, leaving a legacy as a beneficiary also represents a missed opportunity of the donor.
While naming a charity as a beneficiary is simple, the donor cannot get the income tax benefits with this action as he would with an outright gift. The control he maintains over the policy, therefore, comes as a potential loss.
Life Insurance as a Gift to a Charity
Gifting a life insurance policy to a charity is the proverbial win-win situation.
For the charity, it ensures a legacy as the donor intended. When the donor passes, it will receive the entire amount of the life insurance policy without income tax on the benefit.
Furthermore, there is no limit to the amount the charity can receive in regards to estate taxes. The donor benefits as well.
The donor of the policy may receive income tax credit for a donation to a charitable cause for its fair market value. This amount could be significant.
However, there are other variations on this theme which are equally beneficial.
For example, the donor could gift the policy to a charity for the initial income tax deduction. Then, he could continue to pay the premiums which are deductible.
However, gifting a policy to a charity means the donor cannot take advantage of loans drawn against it.
The risk still exists where any outstanding loans will reduce the amount of the benefit to the charity.
In some cases, the question of loans is a moot point. Yet, there are other ways to accomplish this task to the benefit of both the charity and the donor.
Instead of the donor transferring an existing policy, he could take out a new one to donate to the charitable cause.
The charity could also take out a life insurance policy on the donor with the individual paying the premiums.
The charity receives the future windfall gift while the donor gets the income tax deductions during his lifetime.
Again, both parties benefit in the long run.
Gifting Annual Dividends from a Life Insurance Policy
Another option is to give a charity all the annual dividends from an existing policy which the donor owns.
Again, it offers advantages to both parties involved. The charity benefits from the annual monies it receives.
This can provide a good source of guaranteed income for the beneficiary of the funds, depending on the insurance company’s investment performance, of course.
The donor receives the benefit of income tax deductions from the monies they donate to charity. He also retains control over the life insurance policy.
If there are several charities, it offers one way to give to other organizations, too.
This means he can get the other advantages of a cash value life insurance policy such as loans taken against it.
Adding a Charitable Giving Rider
A donor can also opt to include an add-on provision to an existing policy with a charitable giving rider.
Unlike the other options for charitable giving, this rider has some limitations and conditions.
However, once it’s in place, it is a hands-off plan as far as the donor is concerned.
The owner of the life insurance chooses the charity of his choice which is then named in the policy. He may change the charity at a later time if necessary.
They don’t affect other aspects of the life insurance including its death benefit, cash value, or the premium in which the owner pays.
However, limitations exist with the type of product for which a donor can obtain the charitable giving rider.
The life insurance policy must have a face value of over $1 million. Also, the charity must be an accredited 501(c) organization by the official IRS definition. This caveat may pose a disadvantage for some donors. Other conditions may also exist.
The insurance company may have limits on the amount an owner can donate.
Then, there is the charity itself to consider. Some organizations may not accept these monies. It behooves the donor to plan his gift with the charity to ensure a smooth process when the time comes.
The advantage for the charity is, of course, the gift it receives.
For the donor, he retains the control and other benefits of having the life insurance policy.
He can change the charity if he chooses. It also allows him to make additional donations to other charities using any of the strategies mentioned previously. The charitable giving rider simplifies the entire process for the donor.
Giving with Wealth Replacement
Yet, even another option exists with wealth replacement. While most of the above practices relate to senior citizens because of the end-of-life parameters, this one allows a bit of a younger crowd to engage in similar giving practices.
In this scenario, the donor can make an immediate gift to the charity. He then takes out a life insurance policy owned in trust for his heirs for the donated value.
The primary advantage rests with the heirs who avoid estate taxes on the death benefit of the policy.
The benefits fall primarily to the donor who has the opportunity to witness the fruits of his donation in his lifetime.
It also gives him the control to give to the organization of his choice without the limitations of some other methods.
He can receive the income tax deduction on his donation in his lifetime while ensuring a legacy for his heirs after he has passed.
The charity benefits from an immediate gift with the opportunity to work with the donor for additional legacies. It may also have some input on the type of donation it receives which gives the charity some control in the process.
Quick Summary
A life insurance policy offers the flexibility of several options for donating to charitable causes.
Each one varies on the advantages it affords both the donor and the charity. They also differ in the amount of control the policy owner retains.
When choosing a strategy, the donor should consider the income tax deductions he can receive in his lifetime while ensuring a legacy for the future.
In any case, always speak with a professional, like us, in regards to your life insurance, but also consider bringing in your legal and accounting professionals, as well.
These types of plans can be simple, or rather complex.
