You might view life insurance strictly as an income replacement vehicle for your family should you die unexpectedly. So, now that the kids are grown, you may no longer perceive a need for a sizable whole life policy.
Strategy: Donate the life insurance policy to charity. Just name the charity as the beneficiary of the policy and then transfer legal ownership to it.
As long as you don’t retain any “incidents of ownership” of policy—such as the right to change beneficiaries—you can claim a current tax deduction for your generosity. The deduction is equal to the policy’s cash value. Your insurance carrier can provide more details.
4 nontax advantages
- Ease of transfer. You don’t have to amend your will to make the gift. Just assign ownership of the policy to the charity.
- No loss of current income. Unlike gifts of stocks or most other assets, you’re not giving up any future income.
- Affordability. You can afford to give a larger gift than you normally could.
- Complete privacy. While a gift to charity by will is open to public inspection, you can give away life insurance policy without such disclosure.
The charity gains access to the proceeds as soon as the donor passes away because the proceeds are exempt from probate.
Can the charity simply buy a policy with you as the insured? Yes, but there’s one potential pitfall. In many states, the person or entity buying a life insurance policy must have marriage, blood or financial ties to the insured person. Some states recognize charities as having insurable interests in the lives of others. However, if you live in a state that doesn’t recognize such relationships, transfer the policy after it’s been acquired in your name.
Tip: The gift of a life insurance policy may be used to fund a scholarship or pet project.
Avoid tax bite on group term insurance
The first $50,000 of employer provided group term life insurance is exempt from income tax. Any excess is subject to tax.
Strategy: Give away the excess to charity. This eliminates the tax you would normally owe. For instance, say you’re in line to receive $250,000 of group term coverage. If you designate your favorite charity as the beneficiary of $200,000 of coverage, you pay no income tax on the.