America is a charitable nation. More than two-thirds of Americans (68%) give to charity each year1. That means you probably do too.
Approximately 90% of high net worth households gave to charity in 2017 and contributed an average of $29,2692. This compares to the general population that gave an average of $2,5142. In 2018, the majority of charitable dollars went to the following causes; religion (29%), education (14%), human services (12%) and grant making foundations (12%)1.
There are numerous ways to support the charity of your choice besides writing a check, volunteering or contributing to a donor-advised fund. A gift of life insurance can represent a substantial future gift to a charity or charities of your choice at relatively little cost to you. There are several ways you can accomplish this:
- Make a charity the beneficiary of an existing policy:If you have a life insurance policy you no longer need to support your spouse, partner or family, you can name a charity as the beneficiary of the policy, meaning the charity will receive the policy’s death benefit when you die. You may also list the charity as a partial beneficiary, which allows you to provide support to your family as well as your charity of choice. While there are no current tax benefits to this approach, the value of the policy will be removed from your estate for federal estate tax purposes.
- Make a charity the owner and beneficiary of an existing policy:This means that instead of simply naming the charity as beneficiary of an existing life insurance policy, you transfer full ownership of the policy to the charity. The charity receives the policy’s death benefit when you die. In addition to removing the value of the policy from your estate for federal estate tax purposes, this approach also provides you with current federal income-tax deductions. In addition, if you continue to make the premium payments on the life insurance, each payment is considered a deductible charitable donation.
- Help a charity purchase a new life insurance policy on your life: If you wish to make a substantial future gift to a charity at a relatively low cost to you, another alternative is to consider purchasing a new life insurance policy and name the charity as the policy owner and beneficiary. You then arrange to pay the premiums through gifts to the charity. This approach provides federal income tax deductions and the policy proceeds are not included in your estate for federal estate tax purposes.
- Transfer appreciated assets to a charity and use life insurance to replace your personal wealth. Instead of gifting a life insurance policy to a charity, you may instead transfer other assets to the charity and get an immediate tax deduction. You can then keep your existing life insurance and/or buy a new policy that will help replenish the wealth that was gifted to the charity. This strategy works well if you have highly appreciated assets that are gifted to the charity, and the charity is allowed to sell the asset without incurring a taxable gain.
Donating a life insurance policy can be a smart move under the right circumstances and can help amplify your contribution. Be sure to work with a tax professional to make sure you understand the tax implications of using life insurance for your charitable gifting.
1Giving USA 2019
2The 2018 U.S. Trust Study of High New Worth Philanthropy conducted in partnership with the Indiana University Lilly School of Philanthropy.