Using Life Insurance to Donate to Charity

May 13, 2014

Neil Wyper

Do you want to give more to charity?  Using life insurance, you may be able to leave a larger gift upon your death than you could give during your lifetime.

You could consider life insurance to be a gamble, in which you bet that you will die before the life insurance premiums you pay exceed the amount that the insurance company will pay when you die.  If you die young, then you “win” the gamble and your heirs receive more from the life insurance than you could have given them if you had put the money in savings.

Insurance companies are very good at predicting, on average, how long people will live. Since young people will live for a long time, their premiums are small compared to the insured amount. For young people, a life insurance policy may be an option for making a gift to a charity which exceeds the extra money they have today. If done correctly, the insurance premiums may be deductible as charitable donations, reducing your income tax.

There are three ways of donating income tax proceeds to charities. First, if a donor specifies their own estate as the beneficiary of the life insurance policy, and in their will gives the money to the charity, then there is no income tax benefit during the donor’s lifetime. If the will is varied by a court after death, the amount given to charity may be less than the donor intended. However, the donor will receive a charitable donation deduction on their income taxes for their final year of life based on the amount actually paid to the charity.

Another way to designate the charity as the beneficiary of the life insurance policy. On death, the proceeds are paid directly to the charity, without passing through the donor’s estate. This avoids the risk of the will being varied, but might not entitle the donor to deductions for charitable donations during the donor’s life. If the charity is irrevocably designated as the beneficiary of the life insurance policy, the premium payments may qualify as charitable donations.

The final, and possibly the best, approach is to arrange for the charity to acquire life insurance over the donor’s life. The donor has no control over this insurance policy, but the donor continues to pay the premiums for the insurance. In this case, the payment for life insurance premiums is a charitable donation which can be deducted throughout the donor’s life. If the donor dies young, the charity receives a larger payment than the donor would have otherwise given.

There are other considerations, and I encourage you to speak with a financial professional to determine how you could most effectively donate to charity.