Using Your Life Insurance Policy for Charity

Using Your Life Insurance Policy for Charity

Using Your Life Insurance Policy for Charity

Your life insurance policy is a valuable tool you can use in a variety of ways. Although the most common beneficiaries of death benefits are typically family members, you may also support a charity of your choosing. Here’s an overview that explains how using your life insurance policy for charity can allow you to benefit a cause, mission, or organization close to your heart.

How Can I Use My Life Insurance Policy for Charity?

Many modern life insurance policies offer what is known as a charitable giving rider. A rider is a provision that allows for the modification of a policy. A charitable giving rider, therefore, is an amendment that allows you to pay a portion of your policy’s value to a qualified charity of your choice. You’ll need to review specific items with your financial advisor to ensure that:

  • The charity you choose is a qualified charity
  • The charity accepts life insurance policy gifts
  • The gift you intend to provide is within the maximum allowable gift limit
  • The rider does not provoke a fee
  • The gift does not reduce the value of the policy or the death benefit

A second way of using your policy for a charity involves making a policy donation. A policy donation may offer benefits that better align with your goals, as a donation in lieu of a rider can reduce your taxable estate. A policy donation may also ensure that the charity receives a larger sum of money. 

Is Using My Life Insurance Policy for Charity Right for Me? 

Determining how your death benefits will be allocated is a highly personal decision. You should meet with your trusted financial advisor or wealth manager to conduct a financial analysis before making changes to your life insurance or purchasing a new policy.

During your analysis with your financial advisor, you’ll want to determine how attaching a charitable giving rider or making a policy donation will impact your overall portfolio. You’ll also want to determine whether you’ll gift the policy to a charity, or whether it makes more sense to use a life settlement to cash out the policy. If you use a life settlement, the cash value of the policy will go to the charity of your choosing. 

Benefits of Using Life Insurance for Charity

Allocating your life insurance benefits to a charity offers several potential benefits. These include:

  • Access to lump-sum payment immediately
  • Potential income tax deductions
  • Ability to gift large sums (unrestricted amounts)
  • No impact to your overall financial plan
  • Opportunity to leave a legacy for future generations

Example of Using Life Insurance for Charity

A couple who has engaged in robust estate planning no longer needs their life $5 million life insurance policy. The current cash value of the policy is $1.5 million. They wish to use this money as a vehicle to aid a local charity benefiting children.
After a comprehensive financial analysis, it is determined that the couple can put up their policy for a bid and donate the proceeds to the charity. Alternatively, they can gift the policy, as the non-profit they wish to benefit is a qualified charity. The couple chose to use the policy to benefit the charity since it had no negative impact on their overall financial plan. But it did have a positive impact on a charity they have long supported.

Speak with Your Financial Advisor before Making Changes to Life Insurance

If you’re ready to amend your life insurance, or you’re ready to purchase a new policy, be sure to speak with a trusted financial advisor first. The experienced financial advisors and wealth management specialists at Finley Davis will identify any potential impacts to your overall plan so that you don’t make a decision that has unforeseen implications. Finley Davis is an independent financial firm, which is not bound by corporate restrictions. This enables us to offer you a wide variety of products and avenues to create a robust financial plan. To schedule an appointment with Finley Davis, contact us today