Using Life Insurance Policies for Charitable Donations: An Often-Overlooked Generosity
Published on by Lynn Meiser in Consulting, Not-for-Profit
Life insurance policies are a great way to pass on a large sum of money to a beneficiary when the policy holder passes away. But one often overlooked strategy is using life insurance policies to make charitable donations – and that’s a key strategy for non-profits to educate their donors about.
Many donors do not know that they can name a non-profit organization as the beneficiary of a life insurance policy, which makes it possible to give a much bigger donation than the donor may have been able to contribute to the organization throughout their lifetime. Donors can also name more than one beneficiary, dividing the death benefit among loved ones and a charity.
Ways to Give
The first option is to name the charity as the beneficiary of the plan. This is the most direct and simplest approach. Doing this will give the organization the full benefit of the policy upon the policy holder’s passing.
It’s also possible to donate a life insurance policy that the policy holder already has by updating the policy’s beneficiary information. This type of transaction is irrevocable, meaning it is transferred to the charity completely and will automatically be excluded from any estate considerations. It’s strongly recommended that the donor notify the organization of their beneficiary status – and the donor will likely need your organization’s Tax ID number, and it is recommended to let the organization know that it is a beneficiary.
The last option is to have the donor coordinate a plan with your organization. The organization can pay the premiums on behalf of the donor in exchange for the donor making contributions of an equal amount. This essentially does the same thing as the first option, but it guarantees the organization will receive the benefit because they’re paying the premiums – a sort of insurance on the insurance policy if you will.
Tax Advantages for Donors
Donors may be able to deduct the premiums paid towards the policy since they’re treated as direct donations. Any policy without a charitable organization as the beneficiary is not allowed this treatment, since it is considered a personal expense. For this to apply, the donor must have a permanent policy that is guaranteed to the charity.
Another deduction is available when the policyholder transfers a plan in full to a charity. The donor may deduct the lesser of either the fair market value of the plan or the donor’s basis in the plan in the year of transfer on the donor’s personal income tax return.
Questions? Contact Us
If you’d like to learn more about how a donor can gift a life insurance plan to a charity, and whether this generous option makes sense for you or your organization, call us at 317.572.1130 or contact us online. We look forward to talking with you – and we’re here to help.