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Life Insurance and Charitable Giving: Making a Difference after You’re Gone

More than two-thirds of Americans give to charity.1 So it’s no wonder that many individuals want to continue the tradition of giving once they’re gone. But for many, the tax and legal challenges of setting up a life insurance policy in which the beneficiary is a charitable organization is a complicated process. In this article, we will cover the ways you can give to charity using your life insurance policy, things you need to consider before doing so, and who you need to contact to best protect your life insurance policy.

It’s important that you consult a professional to help you navigate the accounting, legal, or tax implications of naming a charity as your beneficiary or as a policy owner before you make these final decisions.

Ways of giving to charity after you’re gone

There are several ways you can give back to charity once you’re gone, but the first thing to consider is how to outline the insurable interest of any charity you choose before naming them in your policy. In general, there are three ways of giving back to charity with life insurance:
  1. Make the charity a beneficiary of your policy, where they receive all or a percentage of the death benefit.
  2. Make the charity the owner and beneficiary of the policy, where you would transfer ownership of an existing policy.
  3. Help the charity get a new policy on your life, where they are the owner and the beneficiary. 1
The first scenario may be the easiest path for policy owners who wish to give a portion of their death benefit to charity, but the other two options require a bit more legwork.1 In these instances, the policyholder and/or the charity will have to prove that they have an insurable interest in your life.
Proving an insurable interest means they may have to prove to the insurance company that there would be a negative impact on the charity in the event of your passing. Insurable interest is the basis of all insurance policy underwriting, so scenarios where the charity owner is made the beneficiary of the policy or the charity gets a policy on your life may best be reserved for instances in which the insured person has a direct connection with the charity (such as being a board member or other major investor).2

What you need to consider

State laws oftentimes govern how and when you are able to list a charity as a recipient of your death benefit. 1 Again, it’s important to remember that states and insurance companies will require there to be an insurable interest in some cases, but most states will allow you to name a charity as a beneficiary. Just know that some states will impose limits or rules on what benefit percentage charities can receive, so it’s best to check with your state and a licensed insurance professional before changing your policy.
When weighing your options between adding the charity of your choice to your life insurance beneficiary, transferring ownership of your life insurance policy, or helping the charity get a policy on your life, you should consider who pays the premiums.3
One way to handle the policy premium issue is to transfer ownership of a policy that’s paid up. 2 By “paid up,” this means that the policy premiums have either been considered paid-in-full by the insurer or the payments are being drafted from the balance of the cash value of the policy.4 This can help relieve any administrative headaches that your charity might face of having to coordinate payments for a policy that has premiums still need to be paid on. Plus, when you pay the policy premium, the charity may be required to send you a receipt for tax purposes, which can lead to more confusion about payments.
Finally, if you retain ownership of the insurance policy, just know that you can add additional beneficiaries, up to the limits imposed by your state and insurance provider. However, if you transfer ownership or allow the charity to get a policy on your life, you do not have control of other beneficiaries who might be added to the policy.

Final things you need to know before updating your policy

It’s important that you consult a professional to help you navigate the accounting, legal, or tax implications of naming a charity as your beneficiary or as a policy owner before you make these final decisions.5 To help clarify your wishes, it will likely be important that you have a clearly-outlined will to state your final wishes – especially if there are other beneficiaries involved.
Charitable giving is at the core of the American way, but before you provide your charity of choice with ownership and/or beneficiary rights to your life insurance policy, it’s important to know what you’re getting into. Consider the details in this article (and consult a professional) before you move to alter your policy.