What types of life insurance policies can be donated?
When it comes to donating your life insurance to charity, some policies may be better suited than others. While it's possible to donate either a term life or permanent life insurance policy, a permanent policy ensures a donation no matter when you pass away. A term life policy could potentially expire while you're still living, and then your death benefit wouldn't be distributed. A permanent policy, whether it's a whole or universal life insurance policy, as long as the premium is paid, will pay out a death benefit regardless of how long you live.
What are the benefits of life insurance charitable giving?
By donating your policy or naming a charity as your life insurance beneficiary, you can leave a legacy using something you already own. For example, say you purchased a permanent life insurance policy 20 years ago to help your loved ones in case you died, and they needed financial support. However, now that time has passed, your original beneficiaries would no longer need financial support if you passed away. By donating your policy or naming a charity as a beneficiary, you can rest assured the policy still benefits a cause you care about. Plus, depending on your circumstances, it might allow you to make a much larger one-time donation than you'd be able to make using cash from your estate.
There can also be tax benefits to donating life insurance to charity. However, they can vary depending on the type of insurance policy you're donating and your individual circumstances. Check with a financial advisor or tax attorney before donating an insurance policy to charity.
How do I go about donating life insurance to charity?
You have options for donating to charity via your life insurance policy. Here are some ways you can donate:
Transfer ownership of your policy
To make a permanent gift of life insurance to charity while you're still alive, you can transfer ownership of your policy to the desired organization. The policy's death benefit will go to the charity once you've passed away if it's named as the beneficiary, which — as the new policyowner — the charity will control.
Once you've transferred ownership of the policy, you cannot change it back. And keep in mind that you or the charity will need to continue making premium payments if the policy isn't yet paid in full. Talk with your insurer beforehand about who will be responsible for the outstanding premium once the policy is transferred.
After you transfer a policy, you won't be able to take it back.
The biggest drawback with this type of donation is that the charity won't receive the benefit until you pass. However, if the policy has cash value, the charity could potentially access those funds before you pass by taking out a life insurance loan. They may also be able to cash out on the policy before you pass by selling it or taking out the full cash value amount.
Name the charity as a beneficiary
Naming a charity as the beneficiary of your life insurance policy allows you to retain ownership of the policy while still donating your death benefit after you pass. You can even name multiple beneficiaries, splitting your death benefit between multiple charities or giving a specified portion to loved ones while also donating some. As long as your beneficiaries are named revocably, you can always change them or the payout amount they receive.
Give an annual gift through dividends
If your policy has a cash value component, it may also pay out dividends when the insurer performs well financially. Depending on how you choose to receive your dividend, you may be able to cash the check and use it as a charitable donation while you're still alive. This method offers flexibility, as you can change the charity you give to from year to year. Plus, you may be able to see the fruits of your donations over time.
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