Life Insurance and Charity

Life Insurance and Charity

Many life insurance customers do not realize the advantages of the policies they hold. In particular, Americans of a charitable disposition that give cash and property to charities of their choice do not realize how life insurance can help them. While charitable donations do provide substantial benefits in the form of tax deductions, policyholders can use their life insurance policies to augment their support of favored charities. There are multiple methods to achieve this goal.

Charitable Giving Riders

These are relatively new to the world of insurance riders. They are attached to policies with a death benefit of over $1 million. Once attached, they pay one to two percent of the value of the death benefit to a charity of the policeholder’s choice. The insurance company usually has to approve the choice before the rider starts working, and there may be limits on the dollar amount of the gift. Charitable giving riders usually do not increase the premiums, reduce the cash value or decrease the death benefit of the policy. The charity chosen under such a rider must meet the IRS definition of a 501(c)3 nonprofit organization.

Policy Donations

This method is more detailed than purchasing a charitable giving rider, but it has advantages for the donor as well as the charity. Simply donating a policy can reduce the donor’s taxable estate. This saves thousands of dollars for taxpayers with higher incomes subject to the estate tax. Donating a policy also provides a tax deduction for the amount of the policy’s fair market value. Upon the death of the policyholder, the charity will receive the face value of the policy. This can be quite a substantial amount. Even more good news is the premiums made to the policy are also tax-deductible after the date when the policy was donated. There is no limit to the dollar amount of the policy. Charitable donations have no limit for purposes of the estate tax.

Naming Charities As Beneficiaries

Aside from adding a rider or donating a policy, a policyholder can name a charity as the beneficiary of his policy. This is the simplest method, but it does not carry the same income tax advantages as donating a policy outright. Despite the lack of income tax benefits, naming a charity as the beneficiary reduces the donor’s taxable estate by the dollar amount of the death benefit. Uncertainty may be dealt with by naming a revocable beneficiary like a charity. This comes in handy if the donor’s financial situation changes later on.

Donating Policy Dividends

Receiving the dividends paid from a policy in cash and donating them directly to a charity is another alternative. These donations are tax-deductible. This does not require any additional cash from the donor.