Is It Worth Donating Your Life Insurance To A Charity?
The benefits of donating your life insurance policy to charity can be varied and
, perhaps, dubious. To see the ramifications of doing so, first check out what you'll be accomplishing for yourself - and for the charity. It all depends on the circumstances: your circumstance and the charity's. Here's the scoop...
*Circumstances on your side:
Donating to a charity produces tax deductions for you. But just what's necessary to qualify for deductions and what are the deductions you can take?
You must donate to a qualified charity to get any deductions. That generally means the charity must be a nonprofit institution registered with the IRS as a 501(c)(3) organization. The IRS maintains an updated list on all such organizations that you can check out on the Web.
You also must make the charity both owner and beneficiary of your life insurance policy you're donating to them. That's because if you remained the owner, you could always change the beneficiary later - after you took deductions. So it's an irrevocable gift to charity that you're making.
So, what are those deductions? Deductions depend on the type of life insurance policy you donate and its payment status. Life insurance policies either have a cash value - like a whole life policy - or have no cash value at all - like a term life policy. You get a deduction for any cash value associated your policy. You also get deductions for premiums you make that are directly associated with maintaining the policy for the charity. But you don't get to deduct the death benefit in either case.
*Circumstances on the charity's side:
Charities are interested in money. That's what pays their bills and the services they render.They may not be interested in owning your policy.
Holding on to a life insurance policy for a death benefit at some future date may not be worth the charity's trouble. If it's a term policy, you may outlive its term and leave the charity with nothing but the administration costs its incurred holding it.
If you have a cash value policy, the charity may simply cash it in and use that to pay bills or invest for a better overall return. That'd negate your any remaining premium payments you were planning on making for the deductions they'd give you.
What if you give the charity your whole life policy and let them make whatever remaining premium payments are due? That would depend on the capability of the charity to administer this, and if it were worth it to them. It's kind of like a life settlement situation where the buyer (here the charity) would determine if it's worth paying premiums for the death benefit they'll get in the future. I don't think they'd go for that unless they could easily make the payments and you were well beyond your life expectancy.
If you're considering giving your life insurance policy to charity, call up the charity to explain what type of policy you have and its status. They may have a better way of disposing of it for their benefit and yours. It's their business to know how to best handle donations.
by: Shane Flait
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