You might think of life insurance strictly as income replacement for your family if you should suddenly die. So, at some point, you don’t need that big whole life policy anymore.
Strategy: Donate life insurance to charity. You name your favorite charity as the beneficiary of the policy. Then you 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 can claim a current tax deduction for your generosity.
The tax write-off is generally equal to the policy’s cash surrender value. Contact your insurance company to find out the exact value.
4 nontax benefits, 1 pitfall
Note that the benefits of this technique aren’t limited to the tax implications. Here are some nontax issues to consider:
1. Ease of transfer. You don’t have to amend a will to make the gift. All you must do is assign ownership of the policy to the charity.
2. No loss of current income. Unlike gifts of stock or other income-producing property, no income is lost.
3. Affordability. You can afford to give a 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. While a gift made by will 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 proposition. The charity gains access to the proceeds as soon as the donor passes away because the proceeds are exempt from probate.
The 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, the policy should be transferred to the charity after it is acquired in your name.
Tip: The gift of a life insurance policy may be used to fund a scholarship or special project with a charity. 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.