Donating Your Life Insurance to Charity
As the hunt for funding gets more and more challenging for many non-profit and charitable organizations, I've seen more and more short bit's of information on donating your life insurance as a legacy. Is this a good idea? What do you need to know before you decide to take this route? And is it the best one for you?
First of all, charitable donations are tax deductible. While this isn't usually a prime motivator for most of us, it does make the donation to a charity even more inviting. After all, you can support a cause you believe in and get a tax break on the money you give. It's a win-win, right? If a tax benefit is one of your motives for signing away the benefit's of your life insurance policy, you should first confirm a few things first.
You need to be sure that the organization actually has non-profit status. If it does, it will be a 501(c)(3) organization. These kinds of organizations are the only ones that qualify for tax deductions.
Once you've confirmed the organizations status, talk to someone at the organization to make sure it will accept your life insurance policy proceeds as a gift. Some charities prefer not to receive these kinds of donations, due to the amount of work involved for them.
In order to take a deduction when the time comes, you will have to make the charity both the owner and the beneficiary of your policy. If you name the charity as your policy's beneficiary, but not the owner, then the IRS won't let you deduct the donation of your life insurance proceeds from your taxes. It's that simple.
So, if insurance is your donation of choice, do you donate a term life policy or whole life policy? Term life insurance policies cost you the least, but they're also the least attractive to charities. After all, once the term expires on that policy, it's worthless. Whole life policies cost more, but they have a cash value that builds up the longer you pay premiums on them. Thus, a whole life policy has some intrinsic value to it, although it's usually far less than the actual death benefit.
If you donate a term life policy to a charity, you can deduct the cost of the premiums from your taxes. If you donate a whole life policy, you can deduct the cash value of the policy as well as the cost of the premiums. So, while the whole life policy costs you more, you also get to deduct more from your taxes. Depending on your situation, this may make more sense.
The big problem for most organizations that are promised the proceeds of a life insurance policy is that they have to wait to receive the funds. Most would much rather have the use of a donation right away. After all, with a life insurance policy, the organization cannot even plan for when the money will be available. So, keep the needs of your charity in mind when you are looking at this option for donation purposes.