LIFE INSURANCE AND CHARITABLE DONATIONS

Millions of people in America make charitable donations of cash and property to their favorite institutions every year. Cynics may say that these donations are useful as tax deductions yet many Americans wish that they could do more to help those in need. The good news is that life insurance policies can be used for charitable purposes as it is a convenient asset to give. This article will show you a number of ways in which you can use life insurance as donations and how they can benefit everyone concerned.

Charitable Giving Riders

These are a new addition in terms of riders on the life insurance circuit. They can be attached to policies with face values in excess of $1 million. The policyholder can then pay 1-2% of the face value to a charity of their choosing although there are often restrictions on the amount that can be donated. These riders do not cost extra nor do they increase the premium or reduce the cash value of their insurance policy. With these riders, there is no need to deal with awkward gift trusts until the day the insured individual dies.

The policyholder doesn’t have to do anything else once the rider has been added. Limitations of the riders include the amount of protection that must be bought in order to use them. Also, any charity that is nominated by the policyholder must be a qualified 501(c)3 charity which is a non-profit organization by the rules imposed by the IRS. You should also be sure that the charity will accept your donation as believe it or not, certain organizations actually reject term policies and others as a form of donation.

Policy Donations

This requires a little more effort than simply buying a charity rider but they also are beneficial to both charity and donor. Higher earning taxpayers especially could benefit as giving a life insurance policy as a gift can reduce your taxable estate which can save thousands. This gift could also yield an income tax reduction of the fair market value of the policy which could lead to enormous savings depending on your level of income.

Additionally, the charity chosen will receive the full face value of the policy once the insured dies which is generally several times more than what they would receive from any rider. For the donor, premiums paid after the donation will be deductible and the cost will be only a small percentage of the face value of the policy.

As charities have no limit for estate tax purposes, there is no restriction on the size of the policy donated. If the donor has an investment strategy it will not be affected and this donation is also an ideal way to get rid of an unwanted policy that covers something that is no longer applicable.

Naming a Charity as a beneficiary

Choosing a charity to benefit from your insurance policy is the simplest way to ensure that the charity gets the money from your policy although it does not give the same income tax benefits that gifting a policy does. It does however still reduce the estate of the donor by the amount that the policy pays out. Those who are unsure as to how they want their assets shared out after their death can choose a revocable beneficiary in the event that their future financial situation changes.

Another plus point for those looking to donate to a charity in this way is the fact that all transactions of this nature are private. Therefore, family members and others with a vested interest will not know the intentions of the insured. When someone transfers assets from an insurance contract it cannot be contested so no one outside the policyholder has the ability to halt the transfer and they can still choose a different beneficiary before their death. If the donor decides not to pay the premiums any longer then the charity can either pay themselves in order to benefit or else they can simply allow it to be terminated.

Gifting Policy Dividends

While this does not give the same amount to charities as the above strategies, gifted policy dividends allows policyholders to get the dividends paid to their life insurance policies in cash and give this to charity. Just like premiums paid on any gifted policy, these dividends are deductible and don’t require the donor to pay any extra cash. This is also a good move for corporations to gain community and tax benefits.

Conclusion

Life insurance policies are a great way for donors to leverage donations in cash to charity. They can either name a charity as a beneficiary or else they can give the policy as a gift. Either way, the charity that they care about will be the big winner. It should definitely cross the minds of donors to think about using charitable riders on their insurance policies so that charities will gain something from them. Book an appointment with your financial advisor or insurance agent to find out more on the use of your life insurance policy as a way of giving gifts.

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