Do you have a charity in mind that you’d wish to support? Cash donations are not the only way to do this. You can donate your life insurance to the charity and receive a tax deduction in the process.
Why Donate Your Life Insurance?
One, by donating your life insurance, you make a greater contribution compared to making cash contributions. Besides, you don’t have to have a high net worth to make a difference. Even if your premiums are $50000 in order to get a $300000 death benefit, when you pass away, the charity will receive the death benefit. Furthermore, if you have a second-to-die policy, the death benefit will be more than double the amount.
Two, the rich will stand to benefit from a donation. Often, the rich take up life insurance to help curb estate taxes. However, with the recent changes to estate tax laws, they realize that they are over-insured. By donating to charity, they can ease the excess coverage. However, they have to be wary of the tax consequences.
Tax Consequences
The tax benefit will depend on whether the gift is revocable or irrevocable. In most cases, clients value their anonymity and therefore name the charity as the beneficiary designation. However, if they wish to still have control of the policy and the chance to change the beneficiary if need be, the donation is dubbed revocable. Such a gift does not benefit from a tax deduction and is part of the taxable estate of the policyholder.
The other option is to make the donation of the policy irrevocable. In this way, they receive a tax deduction according to the “interpolated terminal reserve value” IRS calculation.
How to Donate Life Insurance to Charity?
One, the policyholder can choose to give the existing policy as a gift. The charity can use proceeds to buy a life insurance policy based on the donor and pay for the premiums.
Two, the policyholder can give the charity the policy dividends and receive a tax deduction.
Three, if an individual is under group term life insurance and has coverage of above $50000, they could appoint a charity to be the beneficiary to the coverage. Not only will they help the charity but they will also avoid having their income taxed on the sum that is above $50000 of the coverage footed by the employer.
Four, donors can make annual contributions to the charity if their insurance policies are not yet fully paid up. The charity will then use the gifts to pay the premiums.
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