USING LIFE INSURANCE TO MAKE A CHARITABLE DONATION
Did you know that every year millions of Americans use their life insurance and estate to make grand donations of property and cash charitable organizations? If this sounds like something that you would be interested in doing, life Insurance can be both an effective and convenient giving tool. In this article, we will examine the different ways that life insurance donations can be made and the advantages of doing so.
WHAT ARE CHARITABLE GIVING RIDERS ON LIFE INSURANCE? HOW DO THEY WORK?
Charitable giving is a relatively new kind of rider. These riders can be attached to life insurance policies that have a value of over $1 million, are used to pay 1-2% of the policy’s face value to the charitable organization of the policyholder’s choosing. However, it should be noted that at times there are limitations that are placed on the maximum allowable amount to the gift to a charity. Charitable giving riders generally come at no additional cost to the policyholder. Not only that they often do not reduce the cash value or the death benefit of the life insurance policy itself. Charitable giving riders effectively eliminate the need for anyone to have to go through the steps of creating, pay for and administrating separate gift trusts.
Once the charitable giving rider has been added to the policy, there is no further action is that needs to be taken by the policyholder. Now, as stated before some of these riders do have a few limitations. Perhaps the most notable limitation being the large amount of protection that must be purchased in order to add the rider to the policy – again the policy has to have a face value of at least $1 million. Any charitable organization that is chosen must be an already qualified 501(c)3 charity. This means that they have to meet the IRS definition of a nonprofit organization. It is also necessary to make sure the charity that you want to support will accept your life insurance policy as a donation. you wish to support will accept your life insurance policy. This is because some policies (most often term) are not accepted by certain charitable organizations.
WHAT SHOULD I KNOW ABOUT THE POLICY DONATIONS OPTION?
Policy donations are a little bit more complicated than simply adding a charitable giving rider to an already existing life insurance policy. They also offer a much greater benefit to both the life insurance donor and the charitable organization. The decision to gift the face value or a portion of a life insurance policy can significantly reduce the donor’s taxable estate. So much so that it can save the estate thousands of dollars in taxes for upper-income taxpayers. Gifting a policy can also lead to an income tax deduction of the policy’s fair market value. Depending on the market, this can be quite large.
More importantly, when someone donates their policy to a charitable organization the organization receives a huge gift. The charitable organization will receive the entire face amount of the policy upon the policyholder’s passing. This amount is usually going to be much more than they would receive from the addition of any rider. Not only that, but the doner also has the option to increase the amount of donation by paying more than the regular premium. In other words, if there is a charity that is near and dear to your heart, and you are in the financial place to do so, you pay extra on your premiums thus increasing the amount that you are gifting the charity when your time comes.
Additionally, there is also no limit on the size of the policy that can be donated. This is because charitable donations have no ceiling when it comes to estate taxes. This can be a great option as it does not impact the donor’s current investment plan. It can also be a useful way to dispose of an unwanted life insurance policy that was initially purchased in order to cover a need that no longer exists.
CAN I ADD A CHARITY AS MY BENEFICIARY?
Perhaps the easiest way to provide a charitable organization with the death benefit from your life insurance policy is to simply name them as your beneficiary. Granted it does not provide the same income tax advantages that gifting a policy does, it still lowers the donor’s estate by the amount of the death benefit. This can be an ideal option for donors who aren’t completely sure how they want to distribute their assets after death. Naming the charity as a beneficiary provides policyholders with flexibility in case their financial situation changes. For example, if the policyholder decides for whatever reason to stop making payments on the premiums, then the charitable organization has the option to either continue the process or they can choose to allow the policy to end.
Naming a charity as a beneficiary also guarantees that their is privacy associated with the transaction. This can be crucial for some policyholders who wish to keep their gifting intentions secret from their heirs or partners. This is because what is called the transfer of assets from an insurance contract cannot be contested. Thus making it impossible for anyone to stop the donation from taking place.