If you’re like most people, you probably think of life insurance as a way to ensure that your loved ones will be taken care of when you die. And you’re not wrong. But life insurance can also be a convenient and flexible way to make charitable gifts, and reward yourself while you’re at it.
Americans are generous people. Every year we give billions to charities. Giving with a life insurance policy can give you the ability to contribute more to your favorite cause, and can potentially offer some tax breaks to boot.Charity makes your money go furtherIf you take out a policy on your life with your favorite charity as the sole beneficiary, the charity will receive the entire amount of the policy upon your death - usually much more than you would ordinarily be able to give. Gifting the life insurance policy itself to a charity can also reduce your taxable estate, and it could earn you a tax deduction during your lifetime, based on the policy’s value. Also, paying monthly or quarterly premiums on a policy owned by your favorite charity may be a little easier than making a lump sum donation.It’s also possible to add your favorite charity as a beneficiary to your existing life insurance policy. This is simpler than purchasing a policy on behalf of the charity, but it doesn’t give you the same income tax deduction. It does, however, reduce your estate tax by the amount of the death benefit paid out.Lastly, if you own a whole life insurance policy, you can cash some of the dividends from your policy and donate the cash to charity. Obviously, these donations are usually much less substantial. But the cash contribution is tax deductible, and they require no additional cash outlay from you.Policy ownershipYou can transfer ownership of a life insurance policy to the charity, so they’re responsible for its administration, or you can keep it yourself. Keeping ownership and naming the charity as the beneficiary gives you complete control, meaning you can change the death benefits, the monthly premium payments and your beneficiary designations.Allowing the charity to own the policy means you lose that control, but it could increase your income tax deduction. And if you buy the policy and then transfer it to the charity at a later date, you could also qualify for a charitable income tax deduction. A flexible giving toolThese are just some of the options that make life insurance a powerful financial tool for charitable giving. Talk to a financial professional to explore how life insurance may help you find more ways to benefit your favorite charity, and to a tax attorney to help you establish your estate plan.
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