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A beneficiary is who receives the death benefit of a life insurance policy
Most people choose a family member as their beneficiary
You can name a charity as your beneficiary or include a rider in your policy
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 like whole life insurance, you can use your life insurance benefit to continue your charitable giving after you’re gone, either by listing a charitable organization as your beneficiary, adding a life insurance charitable giving rider, setting up a trust, or even donating your policy.
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When you buy life insurance, the most important part of the policy is the beneficiary designation. Naming your beneficiaries, the people who will receive the policy’s death benefit when you die, is the reason you buy the policy! But you can also leave a legacy by naming a charitable organization as one of your beneficiaries.
Naming a charity as a beneficiary is simple: you write in the charity name on your beneficiary designation form. Life insurance policies allow you to pick multiple beneficiaries, and even specify what percentage of the money should go to each beneficiary. So you can decide that 100% of your benefit should go to a charity, or 80% to your family and 10% to charity, or any combination you’d like.
It’s also possible to name a charity as your secondary beneficiary. If, for example, your primary beneficiary is your spouse and you have no children or other heirs, you can name a charity as the secondary beneficiary in case your spouse dies with or before you.
There is no federal tax benefit or state tax benefit for naming a charity as your life insurance beneficiary, and you can’t write off your premium payments as an income tax deduction. But with permanent policies, the proceeds will be eligible for the federal estate tax charitable deduction.
If you decide to have a charity beneficiary, 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.
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Life insurance riders are additions and addendums to your life insurance policy that change the terms of a basic policy. There are many riders — and many riders that you should consider, including a rider that can help you make a charitable gift for free.
A charitable giving rider will pay out an additional small percentage of your policy’s face amount — generally 1% to 2% — to the charity of your choice if you die. The donation is on top of the pay out to your named beneficiaries, and it doesn’t come out of their benefit or increase your insurance premium.
There are some limitations to this charitable gift. Many life insurance companies don’t offer charitable giving riders, and the ones that do usually only offer them on high-value policies. Charities have to be a recognized charity by the IRS, usually a 501(c).
A trust 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 as a smart way to leave your life insurance benefit to a minor.
Read more about naming a child as your life insurance beneficiary.
If you’re trying to control how your money should be used after you die, trusts can be incredibly useful. If you simply name someone as a beneficiary on your life insurance policy, they can do whatever they want with the money they get. But if you set up a trust and name the trust as the beneficiary, you can set conditions for the use of the money.
Setting up a charitable trust to receive your life insurance benefit, and then stipulating charitable giving into your trust, is another way to use your life insurance policy to facilitate a donation to charity. In the trust, you can stipulate how you want money given to the charity or designate a charitable contribution to a specific program.
A trust can be set up with your lawyer, and, once created, you can name the trust as the beneficiary of your policy.
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Term life insurance policies are the best policies for most people, but for some people with complicated financial situations, permanent life insurance policies, which don’t expire and have a cash value, may make sense. Policygenius can help you decide which kind of life insurance policy is best for you — you can start by getting quotes.
If you do have a permanent life insurance policy, it’s possible to donate the entire policy to a charity while you’re still alive. This 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 and lower your heirs’ estate tax burden, all while making a charitable contribution.
When you transfer a policy to a charity, the charity 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 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.
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.
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