Charitable giving is a meaningful way to create a lasting impact, and life insurance can be an efficient tool to help individuals support the causes they care about most. Beyond traditional donations of cash, securities, or property, life insurance offers unique advantages — allowing donors to make a larger gift than they might otherwise be able to, while also securing potential tax benefits.
Here’s how life insurance can fit into a charitable giving plan, and the strategies to consider.
Why Consider Life Insurance for Charitable Giving?
Life insurance enables individuals to transform relatively modest premium payments into a significant legacy gift. For example, a policy with a $250,000 death benefit might cost far less in premiums than donating the same amount in cash over time. For nonprofits, these policies provide stability and future funding that supports their long-term goals.
Additionally, depending on how the policy is structured, donors may receive income tax deductions, estate tax benefits, or both. This makes life insurance an attractive option for clients who want to combine philanthropy with smart financial planning.
Common Strategies for Using Life Insurance in Charitable Giving
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Naming a Charity as Beneficiary
One of the simplest approaches is to designate a nonprofit as the beneficiary of an existing life insurance policy. Upon death, the organization receives the death benefit. The donor retains ownership and can change the beneficiary designation at any time. While this does not provide income tax benefits during life, it may reduce estate taxes. -
Donating an Existing Policy
If a client owns a policy they no longer need for family protection, they can transfer ownership to a charity. The charity becomes both owner and beneficiary, and the donor may qualify for an income tax deduction equal to the policy’s fair market value or the premiums paid. -
Purchasing a New Policy for a Charity
A donor can buy a new life insurance policy with a charity as both owner and beneficiary. The donor makes annual premium payments, which may be considered charitable contributions and deductible for income tax purposes. This allows the donor to create a much larger eventual gift than they could provide outright. -
Wealth Replacement Strategy
Some clients hesitate to give away assets because they want to preserve inheritances for heirs. A wealth replacement trust can solve this: assets are donated to charity, while a separate life insurance policy (often owned by an irrevocable life insurance trust, or ILIT) provides equivalent value to heirs at death.
Considerations and Best Practices
- Confirm the charity’s ability to accept insurance: Not all nonprofits have the administrative capacity to manage policies.
- Review tax implications carefully: Deductions vary depending on ownership, beneficiary designations, and premium payments.
- Align with estate planning goals: Ensure charitable gifts fit within the broader estate plan, including trusts and inheritances.
- Work with advisors: Legal, tax, and insurance professionals can help maximize the benefit for both donor and charity.
The Bottom Line
Life insurance is a flexible and powerful tool in charitable giving strategies. Whether naming a charity as a beneficiary, donating an existing policy, or creating a wealth replacement plan, clients can leave a meaningful legacy while also receiving tax and estate planning advantages.
At Pinney Insurance, we help clients integrate charitable goals with their life insurance planning. If you have clients interested in charitable giving strategies, our team can provide the guidance and products needed to make their vision a reality.
