Nonprofit Investment Management Blog

Maximizing Impact: Benefits of Donating Life Insurance Policy to Charity

Posted by Megan Lencoski on May 5, 2023 9:00:00 AM

Maximizing Impact

Did you know individuals can donate a life insurance policy to support their favorite cause? Donating a life insurance policy to charity is a smart way to make a substantial contribution that can often result in a larger payout than a single gift the donor could have made in their lifetime. Moreover, by working with their investment advisor, donors can take advantage of unique tax benefits. Let’s explore how to donate a life insurance policy and what the benefits are.


Why Donate a Life Insurance Policy to Charity?

Most people invest in life insurance to provide a safety net for their family in the event of their death. However, once children have grown up and spouses have passed away, individuals may not feel the need to keep this security blanket.

Some donors even have charity in mind when they open the policy. According to a survey by LIMRA, a financial services research and consulting organization, more than a quarter of Americans who own life insurance cited providing a charitable gift as one of the reasons they purchased their policy. “Since life insurance provides a death benefit several times larger than the premium paid, it is a great way to boost your charitable giving,” says Chris Abrams, founder of Abrams Insurance Solutions, in an article by Forbes

Donors who have decided that their family will be well taken care of without the security of their life insurance policy are free to use that money to support a particular cause. Nonprofit leaders who have done their homework and built relationships with these donors may benefit from a donated life insurance policy supporting their causes.

 

What Are the Benefits of Donating a Life Insurance Policy?

There are several benefits to donating a life insurance policy:
  • The donor may be able to make a larger gift than with disposable income. The death benefit of a life insurance policy is a large sum, often much more than the premium payments made. This payout may be larger than any single gift the donor could have made in their lifetime. A further benefit is that this substantial contribution is made possible through relatively small payments spread across the donor’s lifetime. 
  • There are tax benefits, depending on the type of policy donation and how its donated. Donating a life insurance policy isn’t subject to taxes, probate costs or estate debts. Gifting a life insurance policy to a nonprofit can greatly reduce the donor’s taxable estate because it reduces the total amount of taxable assets upon death. Reducing these assets can save thousands of dollars in estate taxes for upper-income taxpayers.
  • There are also tax deductions for premiums that are paid on a policy after it is signed over to the nonprofit. Because each scenario is different and these laws are always changing, it is important to work with a nonprofit financial advisor along with the organization’s tax advisor to ensure everything abides by the necessary regulations.
  • It’s fairly easy. With a proper system in place, donating a life insurance policy is relatively easy. To initiate the process, the donor contacts their insurance company to change the beneficiary of the policy to the nonprofit. The donor will need all of the nonprofit’s necessary information (tax ID number, address, contact information for the nonprofit’s investment advisor, etc). Once the updated paperwork is signed, the process is complete. As long as the remaining premiums are paid on the policy, the nonprofit will receive the death benefit upon death of the donor.

Donating a Life Insurance Policy to Charity? Here’s How.

It is helpful to understand a few common terms before diving into life insurance policy donations.

Permanent life insurance: An insurance policy that covers an individual until their death, provided the premiums are paid. (It’s different from term life insurance, which offers coverage for a defined period of time such as five, 10 or 20 years.)

Death benefit: The amount of money paid to the beneficiary when the insured dies.

Owner: The individual who purchased the life insurance policy and is responsible for managing and paying the premiums.

Insurance premium: The amount of money an individual or business pays to keep the policy active.

Insured: The person whose life is covered by the insurance contract.

Beneficiary: The recipient of the death benefit, which is paid out when the insured dies.

While it is possible to donate both term and permanent life insurance, permanent is more advantageous for the nonprofit organization. A term life policy could potentially expire while the insured is still living, meaning there will be no death benefit. A permanent life insurance donation ensures a donation will be made no matter when the insured passes.

 

How Are Different Types of Policies Donated to Charity? 

The process of donating a life insurance policy to charity depends on the type of policy and how it is initially set up. Here are the most common scenarios: 

  • The donor retains ownership of an existing permanent life insurance policy and names the nonprofit as the beneficiary.

This is the most straightforward and common approach to donate a life insurance policy.  This method also gives the donor access to any cash value accumulation while living. The organization will not receive the money until the death benefit is paid out upon the death of the insured.

This is a great option for individuals who have a policy that their family no longer needs for financial stability. At the time of death, the nonprofit will receive the death benefit and the individual’s estate will receive the tax benefits. An individual can also name multiple beneficiaries if they would like the payout to be split between recipients.

  • The donor takes out a new permanent life insurance policy and names the nonprofit as the beneficiary.

This approach involves a donor setting up a new policy and making the premium payments. The nonprofit will receive the death benefit upon the death of the insured.

Instead of naming a nonprofit organization as the beneficiary, the donor could choose to transfer ownership of an existing policy to a nonprofit. This transfer gives the nonprofit control of the contract. The donor can claim an immediate charitable contribution tax deduction for transferring ownership to the nonprofit. If future premiums are owed and paid by the donor, they can claim those as tax deductions.

The nonprofit has two options in this case: It can choose to name itself as the beneficiary and receive a tax-free payout upon the death of the insured. If it is a permanent life insurance policy with cash value, the organization can choose to surrender the policy immediately and receive the current cash value.

Note: Before taking ownership of an existing life insurance policy, the nonprofit should be aware of any remaining premiums owed. These premiums represent expenses the organization will incur before the death benefit is paid.

Instead of the organization absorbing these expenses, the donor could also make a pledge that would cover the expenses associated with the policy. That way, there are no additional expenses for the nonprofit, but it still receives the full death benefit.

  • The donor gives dividends from a life insurance policy.

If the donor has begun to receive dividends from a life insurance policy, they can choose to donate those to the nonprofit organization. In this situation, the donor retains ownership of the policy but can claim the donation as a tax deduction within applicable tax laws.

To ensure the most optimal tax deductions for the donor, it is important for organizations to work with a nonprofit financial advisor

 

More Questions on Donating a Life Insurance Policy to Charity?

By donating a life insurance policy, donors can leave a lasting legacy that supports a cause they are passionate about. For nonprofit leaders seeking to maximize their organization’s impact, life insurance policy donations could be an effective strategy. 

Discover the benefits of working with a financial advisory firm that is dedicated to serving your nonprofit and following the fiduciary standard. Schedule a meeting with Carnegie Investment Counsel now to see how our commitment to placing your organization's best interest at the heart of our work can lead to financial success.

 

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Topics: Nonprofit

Megan Lencoski

Written by Megan Lencoski

Megan is passionate about helping nonprofit organizations achieve their goals of maximizing impact and growing revenue streams. With over 9 years of experience working in nonprofit development, she understands that every organization is unique and faces different challenges. That’s why she meets nonprofit leaders where they are and tailors her approach to their specific needs. By providing customized guidance, practical solutions, creative fundraising techniques, and access to an extensive network of resources and specialized tools, Megan helps organizations create effective strategies that will help them achieve their revenue goals.

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