Life Insurance Donations

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Reasons to Give Your Life Insurance Policy to Charity

Many non-profit and charitable organizations have created new ways to obtain funding, including accepting life insurance donations. Before you decide on donating a life insurance policy, make sure it's the right choice for you by doing some research and analyzing your situation.

Life insurance donations to charitable organizations are tax deductible. Although this may not be the sole reason for your generosity, it does make the donation more appealing. Tax breaks allow you to support a cause and see a financial benefit. If a tax benefit sounds like a smart financial decision for your situation and you're ready to sign over the benefits of your life insurance policy, be sure to confirm a few elements of the process first.

The most important information to obtain is if the organization is non-profit. If it is, it will be labeled a 501(c) (3) organization. These are the only ones that qualify for tax deductions. If the organization does not have the proper status, you will not be able to deduct your policy amount and the donation will have no tax benefit. When you have confirmed the organization's status, you should speak with someone at the organization to ensure that they will accept the policy as a gift. There are charities that prefer not to receive these donations due to the amount of work involved with processing the gifts.

Another aspect to be mindful of is that you need to be precise and deliberate in ceding the policy to the organization. In order to take a deduction when the time comes, you must make the charity in the name of both the owner and the beneficiary of your policy. If you name the charity in your policy's beneficiary and not the owner, the IRS will not allow you to deduct the donation of your life insurance proceeds from your taxes. A simple error like this can ruin the tax deduction so make sure you do this correctly.

If you decide that insurance will be your donation, you must choose to donate a term life or whole life policy. Term life insurance policies cost 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 are more costly, but they have a cash value that builds over time. Therefore, a whole life policy does have intrinsic value to it, even though it will typically be much less than the actual death benefit.

If you donate a term life policy to a charity, you are permitted to deduct the cost of the premium from your taxes. Whole life policies are slightly different. If you donate a whole life policy, you may deduct the cash value of the policy and the cost of the premiums. The whole life policy does cost you more, but you also deduct more from your taxes. Depending on your situation, this can end up being more beneficial to you.

The standing issue for most organizations that are promised a life insurance policy is that they must wait to receive the funds, sometimes many years. Most charities would much rather receive a donation that can be used immediately. Remember that with a life insurance policy, the organization is not able to plan when the money will be available. So, keep the needs of your charity in mind when you are looking at life insurance for donation purposes.