Most people think of life insurance strictly as income replacement for their family if they suddenly die. But if you no longer need that big life insurance policy and you're looking for a big write-off this year, consider this strategy:
Name your favorite charity as the beneficiary of your whole life insurance policy. Then transfer full legal ownership of the policy to the charity. As long as you don't retain any "incidents of ownership" in the policy—such as the right to change the beneficiary—you're entitled to grab a generous current tax deduction for your generosity.
How much can you deduct? The tax write-off is generally equal to the policy's cash surrender value. Contact the insurance company to find out the exact value.
4 nontax benefits, 1 pitfall
Donating life insurance to charity isn't just a good tax technique. Here are some other potential benefits:
1. Ease of transfer. You don't need to draw up or amend your will to make your gift. All you need to do is assign ownership of the policy to the charity.
2. No loss of current income. You won't lose any income as you would with gifts of dividend-paying stock or other forms of income-producing property. In fact, your cash reserves may actually increase if the charity takes over paying the premiums after the transfer.
3. Affordability. With this strategy, you can afford to give a much larger gift than you normally could. For example, the cost of a policy with a death benefit of $100,000 is only a fraction of $100,000.
4. Complete privacy. Unlike a gift that's made by will, which is open to public inspection, you can give away a life insurance policy without any disclosure.
From the charity's viewpoint, life-insurance donations are a win/win sit-uation. The charity gains access to the proceeds as soon as you pass away, since the gift is exempt from probate.
One potential pitfall: In most states, the person or entity buying the 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. But if you live in a state that doesn't recognize such relationships, transfer the policy to the charity after acquiring it in your own name.
Final tip: Use the life insurance policy gift to fund a scholarship or special project with a charity. In fact, life insurance has an edge over stocks, bonds and other investments that fluctuate in value. The charity knows the exact amount of cash that will be available and can plan accordingly.
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