Life Insurance as a Vehicle for Charitable Giving

As the holiday season approaches and the long stretch of winter months begins, Americans enter a season of giving, goodwill, and family get-togethers.  Charities and non-profit organizations make their greatest push during this time to ask for donations and fund their outreach.  

When your clients think about life insurance, they most likely are focused on providing for their family, however, life insurance can also be a wonderful vehicle to support the various causes and organizations that they regularly contribute to.  Let’s take this time to talk about how your clients can support their favorite charities through existing and new life insurance policies while easing the tax burden on their estate.

How donating life insurance can be beneficial to both the donor and the charity

Utilizing life insurance as a vehicle for charitable giving doesn’t only benefit the charity.  For clients with substantial estates, gifting life insurance can offer substantial tax benefits for the donor.  The government does not impose a ceiling on charitable donations for estate tax purposes.  This means that while the charity that your client is passionate about helping will receive a substantial sum at the end of the policy, the donor’s taxable estate can be significantly reduced as well, easing the tax burden on their heirs.   

Not all methods of donating life insurance proceeds to a charity enjoy identical tax estate tax advantages but using life insurance to support non-profits and charities can be more effective in terms of the size of the donation compared to simply giving cash.  Let’s look at some of the options for using life insurance to finance donations.

fountain with hands catching water to represent charitable giving

Adding a charity to the list of life insurance beneficiaries

Perhaps the simplest way for your client to support their preferred charities involves adding the charity to the list of beneficiaries.  While the tax benefits of this method aren’t as significant as gifting a policy directly to a charity, adding the charity as a beneficiary will reduce the taxable estate by the amount received.  

The only obvious advantage here is privacy.  When the charity is a beneficiary, the donor is able to keep secret their gift from their heirs.  This also means that the donation cannot be contested, ensuring that your client’s wishes will not be hindered or interfered with in any way.  

Adding a charitable giving rider to an existing policy

A charitable giving rider can be added to your client’s life insurance policy often at no additional cost or loss of value to the death benefit.  The rider specifies a percentage of the policy face value to a charity that qualifies for inclusion in the rider.  There may be some limitations specified in the rider as to the amount of the gift.  These should be discussed with your client when considering the best approach to support their preferred charity.  These riders may also require a higher amount of protection in order to qualify.  

Some Charitable Riders of Note

Some charitable riders go above and beyond in the name of charitable giving.  For instance, Symetra offers a Charitable Giving Benefit rider at no cost upon purchase of life insurance.  Their rider provides a chosen charity with a dollar amount equal to 1% of the death benefit on the policy.  It also makes it free and easy to change the charity that receives the money throughout the life of the policy. 

Additionally, AXA offers a Charitable Legacy Rider with some of its policies that meet minimum death benefit requirements of $1 million or greater.  This rider adds an additional 1% benefit to the total death benefit for a chosen charity.  

The benefit of a charitable giving rider is ease and convenience.  There is no need to create and manage a gift trust for the charity until the death of the insured client.  This is a simple approach to charitable giving that can offer a substantial windfall to the charity with little effort on the part of the donor. 

A wrapped present representing adding a charity to your life insurance policy

Donating entire policies: Where compassion and tax advantages meet

There are several advantages for both your client and the charity when donating a life insurance policy.  For your client, donating a policy can offer a significant reduction to their taxable estate.  Depending on the wealth your client leaves behind, this can represent thousands of dollars in tax savings.  For high-net-worth clients, donating a policy can satisfy their philanthropic needs and reduce their overall estate tax without disturbing their overall financial plan.   

For the charity, the amount of money received through a donated policy is often much greater than simply adding a rider to their policy.  There is no ceiling on the amount that can be donated.  The donor is responsible for paying premiums on the policy which are also tax-deductible.  

Gifting a life insurance policy can also be used to turn an older, unwanted policy into a meaningful donation.  Perhaps your client has an older policy that no longer fits their current needs.  In this case, converting that policy to a charitable gift can make a difference to both the charity and your client’s taxable estate.

‘Tis the season of giving, let us know how we can help

Rocky Mountain is happy to help you explore charitable life insurance options for your generous clients.  Leaving a financial legacy for their heirs is important, but so is leaving the world a better place than they found it.  

For you clients who want to make a meaningful impact with their charitable giving, let us know how we can help you present them with options that are mutually beneficial.  Happy holidays from all of us here at Rocky Mountain.  We wish you and your family a safe and loving holiday season.