An insurance policy has the potential to create a substantial, cost-effective gift to charity through the policy's death bene t. The result is a gift that is much larger than the donor may otherwise have been able to make.
Also, unlike a charitable bequest made in a will, a life insurance gift does not become a matter of public record and is made without the delays of probate.
Premiums paid by the donor after a lifetime gift of a policy to charity are deductible for income tax purposes when the donor itemizes. When the charity is named as the policy beneficiary, the death proceeds paid to the charity are deductible for federal estate tax purposes.
How Can a Donor Make a Gift of Life Insurance?
A donor has three basic choices in making a charitable gift of life insurance:
- The donor gives an existing policy to charity. In this case, the donor assigns all incidents of ownership to the charity, making the charity the policy's owner and beneficiary.
- The donor applies for a new life insurance policy and designates the charity as owner and beneficiary. Although a majority of states recognize a charitable organization as having an insurable interest in a donor, an individual considering this gift should have an attorney check the applicable state law pertaining to insurable interest.
- The donor names the charity as the beneficiary of a policy that the donor continues to own.
What Are the Tax Considerations?
A charitable gift of an existing life insurance policy can generate an income tax charitable deduction provided the donor assigns all rights. When considering a charitable gift of an existing policy, the donor has two choices:
- Make an irrevocable gift of the policy to charity. The donor qualifies for an income tax charitable deduction equal to the value of the policy or the donor's cost basis in the policy, whichever is less.
- Name the charity as beneficiary while retaining ownership and control of the policy. No income tax deduction is available for this gift. At the time of the donor's death, the policy proceeds will be included in the donor's estate and the donor will receive an estate tax charitable deduction for the money that goes to charity.