You may know that life insurance can protect the financial future of your loved ones, but were you aware that you can use life insurance to leave a donation to a charity close to your heart? Life insurance can help you leave a meaningful legacy behind that makes the world a better place.
There are a couple of things to think about when choosing to use life insurance to leave a donation. First, you will need to decide which charity you would like to contribute to. There are tax considerations, as well as how much control over the policy you will retain. You should keep these factors in mind before deciding how to leave a contribution to a charity of your choice.
Below, we take a deeper look into each of these factors, to help you make informed decisions when it comes to leaving a legacy through your life insurance policy.
Which Charity to Choose: Consider Local Charities
If you want to use life insurance to leave a charitable donation, then you must first decide which charity you’d like to leave the donation to. The truth is, there are plenty of organizations to choose from that have worthwhile causes.
While large charities undoubtedly get a lot of media buzz and attention, have you thought about supporting a local charity in your own neighborhood? These smaller operations can be a great way to give back to a community that gave so much to you! Your donation may even go further towards helping their mission, compared to larger, more established charities who normally receive a lot of donations and support.
When considering charities in your community, you can explore local hospitals, food banks, community housing projects, etc. These organizations are great causes that support your community and improve quality of life for those who are being helped by them.
Get in touch with a variety of charities to learn more about their mission. A member of their team will be more than happy to share their values, goals, and objectives. This can help shine a light on the charity and give you the information you need to make a decision and leave behind a meaningful legacy that you will be proud of.
Once you’ve decided upon a charity or cause, here are a few ways you can use your life insurance to leave a charitable donation:
Name a Charity as a Beneficiary
Naming a charity as your beneficiary is the easiest way to leave behind a meaningful donation to an organization of your choice using life insurance.
If you have an existing life insurance policy, then you can easily change the beneficiary to your charity of choice. If you’re currently purchasing a life insurance policy, you can add the charity as a beneficiary right away. When you name the charity as a beneficiary, you control the policy, but the charity is the recipient of the death benefit when you pass away.
A benefit to this approach is that the death benefit can qualify as a tax credit on your final income tax return. Also, since there is a direct beneficiary, the death benefit bypasses the estate to avoid probate fees. However, it’s important to know that your life insurance premiums are not eligible for a tax credit.
Transfer Ownership of the Policy to the Charity
Another option for using life insurance to leave a charitable donation is transferring ownership of a policy to the charity. In this scenario, a contract is signed that names the charity as both the owner of the policy and the beneficiary. In this case, you relinquish control over the policy by transferring ownership over to the charity.
Since you are no longer the owner of the policy, the death benefit will not qualify for a tax credit. Although, the premiums of the life insurance policy may qualify for a donation tax credit.
If your policy has a cash value, then when you transfer ownership of the policy to a charity, you may be able to get a tax credit for the cash surrender value at the time of the transfer.
Name Your Estate as the Beneficiary
The final option for leaving a legacy through your life insurance is naming the estate as the beneficiary. If you own the life insurance policy, then you will simply outline instructions in your estate explaining that the death benefit needs to be donated to a charity of your choice. This will allow your donation to be received by the charity similarly to naming the charity as a beneficiary. However, by passing through the estate there are certain implications.
Since the death benefit will be passing through the estate, it will be subject to probate fees since the death benefit is technically considered part of the estate. It also means that your life insurance premiums would not be eligible for a tax credit, however the death benefit may qualify for a tax credit.
Each solution offers different benefits to you, the owner of the life insurance policy, and the charity of your choosing. Depending on whether control of your policy or use of tax credits is a priority, some options for leaving a legacy may be preferred over others. Talk to your life insurance advisor to ensure you’re making the best decision based on your personal needs.
When planning for the future, using life insurance can be an effective way to leave behind a meaningful legacy, helping to bring the charity of your choice closer to their cause. Through contribution to a charity, you can continue to make a difference in your community, and the world.
This article is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant, or other professional advisor when tax planning.
