Life insurance can be an excellent tool for charitable giving. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but you and the charity may benefit from tax rules that apply to gifts of life insurance.

Why use life insurance for charitable giving?
There are several advantages to giving life insurance to charity:

Life insurance allows you to make a much larger gift to charity than you might otherwise be able to afford:
Although the cost to you (your premiums) is relatively small, the amount the charity will receive (the death benefit) can be quite substantial.

The charity is guaranteed to receive the proceeds of the policy when you die:
As long as you continue to pay the premiums on the life insurance policy, the charity is guaranteed to receive the proceeds of the policy when you die. The amount of the death benefit is fixed (or in the case of cash value insurance, perhaps even increasing), and is not subject to market fluctuations or loss of principal. Since life insurance proceeds paid to a charity are not subject to income and estate taxes, probate costs, and other expenses, the charity can count on receiving 100 percent of your gift.

Giving life insurance to charity has certain income tax benefits:
Depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value, and you may be able to deduct the premiums you pay for the policy. In addition, an outright gift of life insurance is typically sheltered from gift tax by the charitable gift tax deduction, as long as you're giving a complete interest in the policy.

Giving life insurance to charity has certain estate tax benefits:
If you're worried about estate taxes, you can structure your charitable gift of life insurance to meet your needs. For instance, you can structure your gift so that the proceeds of the policy are not included in your gross estate. Or, you can structure your policy so that the amount of the proceeds payable to the charity can be deducted from your gross estate.

What are the disadvantages of using life insurance for charitable giving?
Donating a life insurance policy to charity (or naming the charity as beneficiary on the policy) means that you have less wealth to distribute among your heirs when you die. This may discourage you from making gifts to charity. However, this problem is relatively simple to solve. Buy another life insurance policy that will benefit your heirs instead of a charity.

Ways to give life insurance to charity
Name a charity as beneficiary on your life insurance policy:
This is the simplest way to use life insurance to give to charity. You, as owner of the policy, simply designate the charity as beneficiary. Designating the charity as beneficiary may allow you to make a larger gift than you could otherwise afford. If the policy is a form of cash value life insurance, you still have access to the cash value of the policy during your lifetime. However, this type of charitable gift does not provide many of the other tax benefits of charitable giving because you retain control of the policy during your life. Upon your death, the proceeds are included in your gross estate, although the full amount of the proceeds payable to the charity can be deducted from your gross estate.

Name a charity as the recipient of dividends:
Another simple way of making a charitable gift is to assign the dividends on your existing policy to charity. You, as owner of the policy, simply make this designation at the time of application, or at any other time while you own the policy. By assigning your dividends to charity you are able to make a charitable gift. You retain control over the policy and its cash value during your life. You also receive an income tax deduction as dividends are paid to the charity. However, this type of charitable gift does not provide many of the other tax benefits of charitable giving because you retain total control of the policy. Proceeds are included in your gross estate, and there's no offsetting estate tax deduction because the proceeds do not go to charity.

Donate an existing life insurance policy to charity:
In order to donate an existing life insurance policy to charity, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to your basis or its fair market value. The policy is not included in your gross estate when you die, unless you die within three years of the transfer. In this case, your estate would get an offsetting charitable deduction.

Donate a new life insurance policy to charity:
In order to use this strategy, you would purchase an insurance policy, and immediately assign all rights in the policy to the charity. You would also deliver the policy itself to the charity. You would pay the premiums and if structured properly, be able take a charitable deduction for those premiums. The IRS may treat this transaction as if the charity itself had purchased the policy on your life. Most states require the purchaser of a policy to have an insurable interest in the life of the insured. Since it would be difficult to prove that a charity has an insurable interest in your life, your estate could recover the proceeds from the charity, and any tax benefits you had received would be reversed. However, if the transfer were allowed to stand, and the proceeds pass to the charity as intended, you would be entitled to the full tax advantages of charitable giving.

Learn More...

Life Insurance Overview | Understanding The Basics | Term & Cash Value
Coverage Amounts | Reading Policies | Planning Concerns | Life Calculator | Life Glossary

Please Note: The information contained in this Web site is provided solely as a source of general  information and resource.  It is a not a statement of contract and coverage may not apply in all areas or circumstances.  For a complete description of coverages, always read the insurance policy, including all endorsements.