Gifting Your Life Insurance

James Battiston
by James Battiston November 30, 2018 / No Comments

Life insurance provides you with the confidence that, upon your death, the financial needs of your loved ones will be taken care of.  But circumstances change during a lifetime, and you might find yourself wanting to make a philanthropic contribution with your estate to leave a legacy or for a tax benefit. If this is the case, you might consider “gifting” your insurance policy. This can be a great way to make a substantial contribution to a cause that is important to you, and it can also have financial benefits for your estate. Let’s look at some of the ways you can benefit by gifting your life insurance policy.

What It Means to Gift Your Insurance Policy

In simple terms, gifting your life insurance means that, upon your passing, instead of the benefits going to a family member or heir, they will instead go to a charitable organization.

If you have a term life policy that is approaching renewal or might expire, this might be a great option for you. Under these circumstances, your policy might have a very low – if any – Cash Surrender Value (or CSV).  If this is the case, you would be forfeiting your policy and therefore lose the investment. However, if you were to gift your policy, you would receive Fair Market Value (or FMV) for it.

By way of example, if your insurance policy had a FMV of $300,000, but a CSV of $20,000, you would receive a much better value by gifting your policy. If the FMV far exceeds the CSV, you would additionally receive a tax credit for the difference. While you can only deduct up to 75% of your net income per year while alive, the tax credit that you receive for the initial donation can be carried forward for 5 years. So if you can’t immediately use the tax credit you receive by transferring the term life policy to a charity, you can still use it in future years.

An additional benefit of gifting your insurance policy is that charitable donations are not subject to probate taxes. By gifting your policy, there could be significant tax benefits for your estate. The credit received could be used to offset any unexpected taxes incurred, therefore resulting in lower fees or greater returns for your estate.

Ways Of Gifting Your Life Insurance Policy

There are three basic ways in which you can gift your insurance policy to a charity. The first is to establish a new policy under the charity’s name; the second is to name the charity as the beneficiary on an existing policy; the third is to transfer an existing policy’s ownership to the name of a charity. Let’s take a look at what is involved in each instance.

Establish A New Policy Under A Charity’s Name

If you currently don’t have a life insurance policy, this is the easiest way of gifting one to a charity. By establishing a policy under a charity’s name and naming them as beneficiary, they will receive the benefit associated with having the policy gifted to them. At the same time, there are benefits to you, the donor. As the donor, you will receive both the tax credit for the donated policy as well as for your continued payments of the premium. Be sure to compare life insurance quotes if you’re currently looking for an insurance policy, so you can find the most suitable one for you.

Name The Charity As Your Beneficiary

By naming the charity as your beneficiary under an existing life insurance policy, said charity will receive the proceeds of your policy upon your death. In this instance, your estate will receive a tax credit the year of your passing, a credit that can be used to offset the value of your estate. This is beneficial because certain assets could be a financial liability upon your death. As the policy owner, you will still have to pay the premiums, but naming a charity as a beneficiary can be a good solution if you are nearing the end of a term-life policy and do not intend to renew it. While the payment of the premiums is not tax deductible, in the event of your passing, you will be making a substantial philanthropic gesture, while at the same time lessoning the taxation on your estate.

Transfer Your Existing Policy To A Charity

To transfer your existing policy to a charity involves changing the policy ownership and the beneficiary to a charity’s name.  If you choose to go this route, you will see immediate benefits from your decision, as you will receive a tax credit for your policy’s fair market value. If you choose to continue to pay the premiums for the policy yourself, as opposed to having the premiums paid by the value of the policy or by other donors, you will have the additional benefit of receiving tax credits for these payments. At the time of your death, the charity you have named will receive the full value of the death benefit, which is usually greater than the initial value of the policy and the premiums. You may also receive a tax credit on the amount donated to the charity at the time of your death, which can be used on your final income tax return.

The opportunity to make a substantial charitable donation at the time of your passing can be a great way to leave behind a legacy. Not only will you contribute to a cause that is important to you, but your estate will also receive a tax credit. If you are considering giving the gift of your insurance policy to a charity, consider talking to a financial advisor beforehand to ensure you are well informed of the implications of doing so. Should you be interested in taking out a new policy in the name of a charity, be sure to get life insurance quotes to receive the best policy to serve your interests. Have you or someone you know decided to gift a life insurance policy? Is this something you would consider doing? Share your comments below.