There’s a lesser-known way to help feed lost puppies, clean littered streets and support needy members of your community. Volunteering and attending fundraisers are important. Even better? Donating.
Over the course of your lifetime, it is likely that you will be impacted by an organization sustained by donations: a church, hospital, university, not-for-profit association, or a traditional 501(c)(3) nonprofit organization. However, not everyone has the means to make a sizeable donation for a cause they are passionate about. That’s where a Life Insurance policy can come in handy.
Many people structure their Life Insurance so that the financial proceeds go to a nonprofit organization after they pass away. Continue reading to learn more about the potential benefits of giving to a charity through Life Insurance and questions to discuss with your Insurance Broker.
Five Benefits of Charitable Giving with Life Insurance
Life Insurance is a financial tool that can provide funds for your loved ones when you pass away. This policy is a great fit in many life scenarios, such as parents with young children or a homeowner with mortgage obligations. As a person ages and grows their wealth, their need for Life Insurance may decrease – which presents a possible opportunity to restructure the policy for a charitable donation. The following are five benefits of donating with a Life Insurance policy.
1. Give back without crunching your budget.
It is probably much more feasible to give a financial gift of $50,000 after you have passed away than to write a check for $50,000 right now. And while no donation is too small to make a difference, it is exciting to think about what your nonprofit of choice could do with such a sizeable gift!
2. Avoid extra fees.
Some Life Insurance policies have a cash value component that the policyholder can borrow from, unlike the policy’s death benefit that is paid after their passing.
It may be tempting to think of this as a “fund” that could provide a donation at a fundraiser or during an annual giving campaign. However, you will pay interest on any amount you borrow. As you can see, leaving the funds untouched may be more beneficial in the long run. Discuss your financial goals with a qualified advisor to learn more.
3. Lower estate taxes.
As Benjamin Franklin once said, “Two things are certain in life: Death and taxes.” Unfortunately for Ben, estate taxes involve a little of both.
At the time of your passing, the value of your estate may be subject to an estate tax if it exceeds a certain threshold. When properly structured, Life Insurance proceeds that are donated to a charity do not count towards your taxable estate.
4. No drama.
If you have heard of probate court before, it is likely that you didn’t hear good things. Probate court can play host to intense and emotional battles between family members who attempt to claim ownership over a loved one’s assets.
Fortunately, when a charity is named as the beneficiary of a Life Insurance policy, the transfer of assets cannot be contested by family members, loved ones or other heirs to an estate. No drama to be found here!
5. Flexibility for everyone.
Working closely with the right advisors, you can evaluate different ways to donate your Life Insurance policy to find the solution that’s best for you.
In general, you can:
- Name the charity as a beneficiary. You maintain ownership of the Life Insurance policy. This gives you the option to make changes to the policy at any time, and leave a financial gift that will not fall under your taxable estate.
- Transfer policy ownership to the charity. This would be an irrevocable gift, which means you cannot take the policy back, but you may be able eligible to take a tax deduction. Because you are giving up permanent control of the policy, other options may be preferable.
- Name a Charitable Trust. A Charitable Remainder Trust allows a donor to transfer property to their trust for the benefit of their chosen charity, which would be managed by designated trustees. The beneficiary of a CRT must be a 501(c)(3) organization and the trust must be irrevocable.
No matter how excited you may be feeling right now (and we hope you are!) remember: Analysis before action. Discuss your goals with a financial advisor, an insurance broker and a tax professional before you sign anything on the dotted line. We can help start the conversation.
Questions to Ask Before Donating a Life Insurance Policy to Charity
There are several important considerations for you and your loved ones to reflect on, including:
- What type of Life Insurance policy can be donated?
A charity can be the beneficiary of any type of Life Insurance policy. Evaluate the different options, from Term Life to Universal Life Insurance and beyond, to find the policy that is best suited to your financial goals.
- How should my policy be structured to make a donation?
Perhaps the charity will be set up as a beneficiary, or maybe you would rather transfer ownership of the policy altogether. Note, it is important to contact the charity you are interested in working with to figure out if they are willing to take on ownership in the first place.
When you maintain ownership of the policy, you can change beneficiaries from one charity to another at any time, or transfer back to your estate.
- How much am I going to donate?
It is a very personal choice to decide whether to donate a percentage of your Life Insurance policy benefits or to donate all of it. Remember to consider your financial obligations upon death, including funeral expenses, estate taxes and any debt that could be transferred to surviving loved ones. The big picture is most important.
Webb Insurance Can Help Accomplish Your Financial Goals
The potential tax impacts of charitable giving through a Life Insurance vehicle are numerous and complex. It is VERY important to get qualified advice from a licensed professional – so look no further than Webb Insurance in St. Charles.
Together with our sister company, St. Charles Financial Services, our team can help you evaluate different options to ensure your donation has the biggest and best impact. We will also help you work out all the financial implications so there are no unexpected hiccups or unpleasant surprises along the way.
Interested in helping your favorite charity with a donation from your Life Insurance policy? Contact us today to set up a free appointment with a friendly local Insurance Broker so we can help you get started.
If you’re still window shopping, get a free quote on Life Insurance with no obligation to purchase.
This article is not intended as a substitute for the advice of a licensed attorney, tax professional and/or financial advisor. Readers should consult with a financial advisor for matters concerning their estate and the tax impact(s) of making a financial gift.