A charitable gift life insurance is a life insurance policy with a charity registered as the beneficiary. The donor pays the premiums on the life insurance policy, intending for the proceeds to go to the chosen charitable organizations. Any charitable beneficiaries must meet the IRS’s definition of a nonprofit organization in New York.
How charitable gift life insurance works
Charitable gift life insurance is a convenient vehicle for charitable giving for several reasons. The death benefit paid after the donor’s death is excludable from their taxable estate, but the donor doesn’t receive any tax deductions for the premiums. The insurance policies are helpful when making it clear where the donor’s donation goes. The insurance contract lists the charities and leaves no ambiguity. Charitable gift life insurances reduce the number of legal disputes from surviving family members.
Sometimes, the donor may retain the right to change the beneficiary of the life insurance policy before their death. When a charity is a revocable beneficiary, the donor can change their mind before they die. Donors can have flexibility by borrowing against the equity in the contract or withdrawing cash from their policies. The cost of these freedoms leaves less money available for charitable giving after their death.
Charitable giving riders
Including a charitable giving rider is another option with a life insurance policy. A charitable giving rider instructs the insurer to pay part of the policy’s face value to a qualified charity of the donor’s choice. Sometimes, there are limitations on the maximum gift amounts. A rider makes amends to or adds benefits to the original insurance contract. Riders don’t usually cost additional money or reduce the cash value.
After a person’s death, the payout goes to the listed charities. In a well-constructed plan, the person’s family has no confusion about who gets the money from the life insurance. Using this type of charitable gift makes a person’s wishes crystal clear.