Charitable Gift Life Insurance

What Is Charitable Gift Life Insurance?

Charitable gift life insurance refers to a life insurance policy where the beneficiary is a registered charity. In doing so, the donor pays the premiums on the life insurance policy, with the intention that proceeds from the policy will be paid to one or more charitable organizations upon the donor's death.

The beneficiary or beneficiaries chosen must be a qualified 501(c)(3) charity that meets the Internal Revenue Service (IRS) definition of a nonprofit organization.

How Charitable Gift Life Insurance Works

Charitable gift life insurance can be a convenient vehicle for philanthropy for several reasons. To begin, the death benefit paid upon the donor's death is excludable from their taxable estate. However, the donor does not receive a tax deduction for the premiums paid each year prior to their death.

These policies can also be helpful in making it absolutely clear where the donor wishes to donate their funds. After all, listing a charity as the beneficiary of a life insurance contract eliminates any ambiguity as to how the donor intended their money to be used. In this manner, charitable gift life insurance can help reduce the risk of legal disputes among the donor's surviving family members.

Important

Charitable gift life insurance can be structured to include multiple beneficiaries and can be written to ensure the identity of the donor or beneficiaries are anonymous, even after the donor's death. This can help avoid probate disputes.

Special Considerations

Depending on the details of the insurance contract, the donor may or may not retain the right to change the beneficiary of the life insurance policy prior to their death. By listing a charity as the policy's revocable beneficiary, the donor can enjoy the flexibility of changing their mind if their financial situation changes.

At the same time, donors can enjoy flexibility by withdrawing cash from their policies or even borrowing against the equity in their insurance contract. Of course, these activities would come at a cost, by reducing the amount of money available to the beneficiary upon the donor's death.

Charitable Giving Riders

Another option is to include a charitable giving rider that can be attached to a life insurance policy, instructing the insurer to pay a specific percentage of the policy's face value to a qualified charity of the policyholder's choice, although sometimes there are limitations placed on the maximum allowable gift amount. A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy.

Charitable giving riders usually come at no additional cost and often do not reduce the cash value or the death benefit of the policy and effectively eliminate the need to create, pay for, and administrate separate gift trusts until the death of the insured.

Rather than naming a charity as a beneficiary or adding a rider that has a similar effect, the act of gifting a life insurance policy can greatly reduce the donor's taxable estate, which can save thousands of dollars in estate taxes for higher-income taxpayers.

Real-World Example of Charitable Gift Life Insurance

Mary is considering various options through which to support three prominent charities in her community. Aside from donating directly to those charities each year, another option available to her is to take a life insurance policy in which these three charities are listed as the beneficiary. Mary would then pay the premiums on this life insurance policy. When she dies, the death benefit from the policy would be paid to these charities.

Although the premiums paid on the policy will not be tax-deductible, the death benefit itself will be tax-deductible for estate planning purposes. Moreover, supporting the charities in this manner will have the added benefit of making it very clear to her surviving family members that the money in question is intended for these specific charities. For this reason, charitable gift life insurance can be a helpful way to reduce the risk of probate disputes.