Donating a Life Insurance Policy to a Charity

Many people would contribute more to charity if they could afford it. One often overlooked asset that could be donated to charity is a life insurance policy that is no longer needed for its original intended purpose. Individuals who might be receptive to this type of charitable gift include those still carrying large amounts of life insurance even though the major financial obligations in their lives have been met.

Of course, good reasons may exist for keeping the policy in force (such as to provide liquidity for a taxable estate or to meet the continuing needs of a surviving spouse or disabled child). Other times, the best option simply will be to cancel any excess coverage, convert it into a paid-up policy with a lower face amount, or sell the policy in a life settlement transaction. Still, for clients with both excess life insurance and a charitable intent, the donation of a life insurance policy may make sense. However, the donation must be handled correctly for the policy owner to get the maximum tax benefits. Here’s the deal.

Seizing on this situation as an opportunity, some charities ask their donors to consider donating life insurance policies rather than (or in addition to) cash in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash (or even no cash, if an existing policy is donated). That a charity may have to wait many years before receiving a payoff from the gift is typically not a problem because charities normally earmark such gifts for their endowment or long-term building funds.

If handled correctly, a life insurance policy donation can net the donor a charitable deduction equal to the value of the policy. A charitable deduction is also available for cash contributed in future years to pay premiums on a policy that was not fully paid up at the time it was donated. However, if handled incorrectly, the deduction is lost. For this reason, we encourage you to contact us if you are considering the donation of a life insurance policy. We can help ensure you receive the expected income or transfer tax deduction and that the contribution works as planned.