The Gift of Life Insurance for the Holidays
It's the season of giving. It's estimated that Americans will spend more than $600 during this holiday season on gifts1, plus even more on food, decorations and other holiday purchases. Charities will also benefit from our generosity this year. According to Giving USA, individuals gave more than $286 billion dollars to charities in 2017, up 5.2% from the prior year2. And 2018 is on pace to be up three percent.
Giving to charity is sewn into the fabric of our culture, but if you have limited expendable income, you may not be able to give as much as you'd like to your favorite charities. While every dollar you drop in the bucket for Salvation Army is meaningful this time of year, if you want to leave behind a larger sum for the charity of your choice, consider using life insurance to donate to a charity.
While it may not be the most common use of life insurance, you do have the option of donating a portion, or the entirety of your policy's payout, to a charity of your choice. In doing so, you may be able to give a higher amount of money to a non-profit than if you were to donate simply out of your wallet. To be able to do this, however, you generally must have a documented history of donating to the charity. For AIG life insurers, for example, the history with a specific charity must be five years long.
There are two possible ways to donate life insurance to charity - you can name a non-profit as your beneficiary or you can transfer the ownership of your policy to an organization.
Just as you might name your spouse or children as a beneficiary of your policy, you can also choose to elect a non-profit/charity to receive your life insurance payout. The amount that charity receives - whether it is just a portion or the entire disbursement, is determined by you.
There are several positives if you choose to designate a charity as a beneficiary. First, you might lighten the financial burden on your loved ones, since a large charity donation could qualify as an estate tax deduction.* Going this route also allows you to change your mind later if your situation or preferences change. For instance, if you decide you'd prefer to donate to a different charity or simply give your disbursement only to family, you can make those changes during the lifetime of your policy. This kind of long-term flexibility may not be available if you decide to transfer ownership of your life insurance policy.
This option offers short-term benefits. In this instance, if you have an existing life insurance policy, you can transfer the ownership of your policy to a charity, making that organization both the owner and beneficiary of the policy. The charity could then maintain the policy until your death or surrender the policy at any time for its current cash value. It should be noted that you must have an existing life insurance policy in order to pursue this option directly with the carrier. For those American General life customers, you can click here to get started.
A valuable benefit of choosing this course of action is that it could provide you with a near-immediate tax benefit because you can use your donation as an income tax deduction. Moreover, if the charity decides to keep the policy (while you pay the premiums), you can deduct the monthly payments you make each year as well.* One of the downsides of this option though is that it doesn't provide flexibility. Once ownership is transferred, it cannot be easily undone, so you probably wouldn't be able to alter the beneficiary later.
Donating life insurance to charity can be a fulfilling and valuable endeavor, allowing you to give more than if you were simply donating cash.
* This information is general in nature and may be subject to change. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult your professional attorney, tax advisor or accountant.