The primary purpose of life insurance is to provide a financial safety net for the loved ones who depend on us, but this isn’t the only reason to have a life insurance policy. You can also use life insurance to leave a legacy for causes you care about. According to the Life Insurance Marketing and Research Association (LIMRA), more than 25% of Americans with life insurance policies report that charitable giving was at least one reason behind their purchase of life insurance.
While it’s possible to donate to a charity through either a term or whole life insurance policy, a gift of permanent life insurance generally makes the most sense. A term life policy is in effect only for a certain number of years, and if you’re still alive at the end of this term, the charity receives nothing.
A whole life insurance policy, on the other hand, will make it to the charity of your choice no matter how long you live, as long as the premiums are paid. If you transfer ownership of the policy to the charity before your death, then the charity can also choose to access the gift earlier by surrendering the policy for cash, eliminating the need to make premium payments. This provides flexibility for the charity and ensures that your gift will benefit the organization you choose.
Putting your cash toward the purchase of life insurance allows your money to grow before it reaches the charity, multiplying the impact you’re able to make. A recent Forbes article gave the example of a hypothetical 50-year-old man in average health who purchases a single-premium whole life policy for $100,000, naming a charity as beneficiary. The expert quoted in the piece projected that the charity would receive $253,661 after the man’s death. Although this is just an example based on a hypothetical man, it illustrates how giving your gift an opportunity to grow can enhance the benefit you’re able to provide.
There are a few different ways you can support the causes you care about with a life insurance policy. Each has its own benefits and drawbacks for the donor as well as for the charity. Consult with a trusted financial advisor or tax professional to help you select the method of giving that’s best for your individual circumstances.
A rider is a provision in an insurance policy that modifies the benefit in some way. A charitable gift rider makes a percentage of a policy’s face amount payable to a qualified 501(c)3 organization that the policyholder selects. These types of riders are typically available at no additional cost and can be a simple way to benefit a cause that’s close to your heart.
When naming a charity as a beneficiary on a life insurance policy, you can list the organization as sole beneficiary, or you can name multiple beneficiaries and specify the percentage of the payout that each is to receive. Beneficiaries can be organizations, individuals, or a combination of both. This is very simple if you already have a whole life policy; you can simply change the beneficiary. Naming a beneficiary is revocable, so you can change your mind or find a more pressing need for the funds in the future.
Another option is to give your chosen charity ownership of your existing life insurance policy. This allows the most flexibility for the charity, empowering it to name itself as beneficiary or surrender a whole life policy for immediate cash. If you continue to pay premiums on the charity’s behalf, you can deduct those as well. It’s important to understand however, that a transfer of ownership is permanent; you won’t be able to revoke it if you change your mind later.
Because mutual insurance companies are owned by their policyholders, these policyholders are eligible to receive a share of the profits. This is why whole life insurance policies provided by mutual companies typically pay dividends. Often, dividends are used to reduce the premiums the policyholder pays or increase the value of the policy. Instead, you could choose to take dividends in cash and then donate them to charity and take the corresponding tax deduction each year. Dividends are not guaranteed, however, and can vary from year to year.
If you’re considering making a charitable gift through life insurance, it’s wise to discuss your options, their tax consequences, and the benefits each can provide with a trusted financial or tax advisor.
ELCO Mutual is a policyholder-owned company that distributes annual dividends to policyholders with eligible contracts. For more information about whole life insurance, subscribe to our blog.