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 death benefit to donate to a charity 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.
Most people choose a family member as their life insurance beneficiary
You can name a charity as your beneficiary or include add a charitable giving rider to your policy
You can also donate through a trust or donate a permanent life insurance policy
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When you buy life insurance, the most important part of the policy is the beneficiary designation. Your beneficiaries are 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 life insurance 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 death benefit should go to each beneficiary. So you can decide that 100% of your benefit should go to a charity, 80% to your family and 20% to charity, or any other combination you’d like.
It’s also possible to name a charity as your contingent beneficiary. If, for example, your primary beneficiary is your spouse and you have no children or other heirs, you can name a charity as your contingent 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 and heirs know the policy exists; someone needs to send the life insurance company your death certificate to start the claims process.
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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 charitable giving rider that can help you make a charitable gift for free.
When you die, a charitable giving rider pays out an additional percentage of your policy’s face amount — generally 1% to 2% — to the charity of your choice. The donation is on top of the payout 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. Not all life insurance companies offer charitable giving riders and those that do usually only offer them on high-value policies. Charities have to be a recognized charity by the IRS, usually a 501(c).
Some institutions that ask for donations are still for-profit groups that you won’t be able to name on a charitable giving rider. The IRS likely categorizes organizations that fall into the following groups as recognized charities:
Religious organizations and places of worship
Literary and arts organizations, including museums and art galleries
Public charities (e.g. the American Cancer Society)
Private foundations (e.g. the Bill and Melinda Gates Foundation)
If you’re not positive that the group you want to name on a rider meets the necessary criteria, search the IRS database to confirm that the organization appears in their records and that their tax-exempt status has not been revoked.
Churches and other religious institutions are automatically considered tax-exempt, so they may not be registered with the IRS. You can still donate proceeds from your life insurance to the religious organization of your choice using any of the other methods outlined here.
A trust is a legal relationship that allows one person to control the property of another person. If you want to control how your money should be used after you die, trusts are 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. 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.
Setting up a charitable trust to disperse the life insurance benefit and stipulating charitable giving into your trust is another way to use your life insurance policy to donate 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.
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.
If you do have a permanent life insurance policy, it’s possible to gift the entire policy to a charity while you’re still alive. This can be a useful way to get an income-tax deduction, get rid of some of 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. However, they can also keep the policy going, continuing to grow the cash value.
If the policy stays active, you can continue to pay the premiums by paying them to the charity. Both these premiums and the policy are deductible on your income taxes. Income 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 want to experience the best outcome for your income and estate taxes, however, 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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