Can I use my life insurance policy to give to charity?

Can I use my life insurance policy to give to charity?

‘Tis the season to be generous, but giving to charity doesn’t have to be limited to the holidays. In fact, your generosity doesn’t even have to stop when you die.

Whether you have a term life insurance policy or a type of permanent life insurance, such as whole life insurance, you can use your life insurance benefit to continue your charitable giving after you’re gone.

The easiest way to give your life insurance benefit to charity: make them a beneficiary

When you set up your life insurance beneficiaries – a.k.a. who gets the benefit when you die – you can easily write down the name of a local or national charity. Life insurance policies allow you to pick multiple beneficiaries, and even specify what percentage of the money should go to each beneficiary. Anyone can add a charity as a 1%, 100%, or anywhere-in-between-percent beneficiary of their policy.

Making a charity a beneficiary has other benefits besides being easy. For one, it gives you the option to keep your transaction private from your family. It’s also incontestable – there’s no way your family can legally try to block that money from going to the charity. (Plus, if we’re talking about a permanent policy, your heirs will get an estate-tax deduction.)

If you decide to leave a benefit entirely to a charity or other organization, make sure your lawyer or one of your heirs knows the policy exists; someone needs to send the life insurance company your death certificate in order to get the process of paying out the benefit started.

Another easy option (if available): a charitable giving rider

Life insurance riders can do a lot of things, like cover expenses associated with critical illnesses and even return some of your premium if you end up not dying. Some life insurance companies also offer what’s called a "charitable giving rider," which can provide an additional 1 to 2% of your base policy to the charity of your choice.

Charitable giving riders do come with limitations, however. They’re usually only available on very expensive policies, for example (though they’re usually free to add once you get there). They also usually have a limit on how much you can donate. They can also only be used on qualified charities, which cuts out many large activist organizations. If this is something you’re interested, be sure to ask your agent how you can make it work.

A slightly more complicated option: a trust

If you’re trying to control how your money should be used after you die, trusts are one of the most useful tools in the world. A trust, most simply put, is a legal relationship that allows one person to control the property of another person. Lots of people set up trusts for all sorts of reasons – you can set up a trust for your special needs adult child, for example, or a trust for a minor. If you’re Richard Gilmore, you can set up a trust so Luke can franchise the diner (that’s a Gilmore Girls reference, for those of you without Netflix).

In this case, however, you’ll want to set up a trust that dictates how you want money given to charity. If you have more complicated instructions than just "send a check to the charity," a trust is how you can outline that and make sure those instructions are actually followed. A trust can be set up with your lawyer (or online with a site like LegalZoom, if you prefer), and, once created, you can name the trust a beneficiary on your policy.

A more advanced method for permanent policies: donating the entire policy

Permanent life insurance policies, unlike term life insurance policies, are complicated beasts that are often used in advanced estate planning. Because of that, donating a permanent policy to a charity can be a useful way to both get an income-tax deduction while you’re still alive and get rid of some your taxable estate.

When you transfer a policy to a charity, they will be both the owner and the beneficiary. At this point, they can liquidate the policy, and take the cash value to use on their good work. However, they can also keep the policy going, continuing to grow the cash value. If you so choose, you can continue to pay the premiums. Both these premiums and the the policy are deductible on your income taxes. Incomes taxes can get a little complicated in this situation, so make sure you run all of this by your accountant or financial planner.

Which option is best for you?

If you follow our advice and buy a term life insurance policy, your best option is to name your charity of choice as a beneficiary on your policy. Just be aware that once your term is up and you outlive your policy (and the charitable rider), you’ll have to find another way to leave a charitable gift upon death.

If you have a permanent policy, however, and want to experience the best outcome for your income and estate taxes, it makes sense to donate the entire policy to the charity of your choice. Talk to your financial planner or the lawyer in charge of your estate planning for more information, or call your insurance company to get the ball rolling.