Solidarity is one of the driving forces of our society. Many people choose to use part of their earnings to help those who are less fortunate than they are. Charity work can offer more than just spiritual fulfillment; there are other advantages, including tax benefits. For this reason, many people decide to use products like life insurance to make donations to charity and welfare.
In this article, you will learn how to use your life insurance as a tool not just to protect your loved ones, but to improve the lives of those in need. Keep reading and take note, because you can save money and help others at the same time.
Insurance as Charity: Article Contents
How to Use Life Insurance to Make Charity Donations
Thinking of others and how to help them is one of the most noble human sentiments. We often have an innate need to share what we have with those who have less, and we go as far as making financial efforts to provide this support. Charity, welfare, and solidarity are part of this same compassionate impulse.
In the United States, it’s also very common for people to contribute to charitable organizations they feel connected to. In fact, an estimated 95% of households make some sort of annual donation. This money goes toward local churches, NGOs, animal or nature protection associations, soup kitchens, academic institutions, children’s homes, nursing homes, and many other organizations that accept donations.
Faced with this desire to do their part, many people come up against a major obstacle: their family budget is too tight and there is not enough money to contribute to charitable causes. What’s more, in many cases, this money is needed to pay life insurance premiums to protect their family.
But there is a way to be involved in charity and keep your life insurance active at the same time. It involves using the policy as a tool to make charitable donations.
There are various ways you can do this. The most common ones are:
- Adding a charitable giving rider. This is one of the newest options, and has only become available recently. It involves adding a rider to your life insurance policy that gives the charity a fixed percentage of the face value of your coverage. These riders are only available for policies with a face value of over one million euros and pay 1-2% of this face value. The organizations receiving this donation must be qualified non-profit organizations. Interestingly, these riders aren’t associated with huge costs and, generally, don’t decrease the cash value or the death benefit.
- Name the organization as the policy beneficiary. Naming the charitable organization as the direct recipient of your payout is likely the simplest way to contribute. When the insured dies, the money from the death benefit will be given to the charity. All or part of the benefit can be donated. This means that there can be more beneficiaries who share the payout with the charity. If you’re not completely sure this is the right option for you, you can name the organization as a revocable beneficiary. If your family situation changes and you need to protect your heirs with the payout, you can remove the charity from your beneficiaries.
- Name the organization as the policy owner and beneficiary. In this case, you purchase a policy directly for the charity, which will be the owner and beneficiary. The donor will be the insured, but the charity will have control of the policy, its profits and the death benefit upon the insured’s death. In this way, the charity can decide what to do with the policy at any time: it can use the cash value, surrender the policy, sell it on the secondary market, wait to collect the benefit, etc.
- Make periodic donations using the insurance cash value. Another option is to use the cash value the policy accumulates, as well as any potential dividends some policies pay, to make charitable donations. That means the donation gets progressively smaller, but this option has the advantage of reserving the payout for your family or other people you want to protect.
Advantages of Using Life Insurance for Charity
There are advantages to all of the options we’ve seen. The first, of course, is the satisfaction of knowing you’re doing something for others. But there are many benefits beyond the positive feelings of altruism, especially from a tax perspective. Charity donations receive special tax treatment in the United States, which also applies to life insurance.
As such, there are significant advantages to using insurance to make donations:
- It reduces the estate tax. In some states, the estate tax decreases if you donate your life insurance policy to a charitable organization. Doing so may significantly reduce the amount of the estate, and it can even become tax-free.
- Deductions for donations. Donating a policy to charity can also significantly reduce your income tax. The deduction takes effect from the moment you make the donation; it applies to your premium payments from that point forward. Everything you pay in premiums after the donation is made official can be deducted.
- Deductions for dividend donations. If you decide to make donations from the dividends you obtain with life insurance, you can also enjoy tax deductions. This is also a valid strategy for companies or corporations, which can then see significant savings in their taxes.
- Ensuring privacy. A major advantage of donating insurance to charity is that it protects the privacy of transactions, which can be useful for many people who want to keep their donation secret and not make their family members or others aware of their intentions. What’s more, the transfer of assets from an insurance contract cannot be contested, so no one can object to the donation.
Which Insurance Is Best for Donating to Charity?
Now that you’ve seen the advantages of using your life insurance to make a donation, you might want to do it yourself. But what type of insurance is best for this purpose?
Of course, the least recommended is term or temporary life insurance.
You can still use a term policy to make donations to charity, because you can name the charity as the total or partial beneficiary of the payout. But this type of insurance is not ideal for this purpose, because it’s designed for a set duration, and unless you die during that time, there will be no donation. What’s more, term coverage tends to be lower.
As such, you should use permanent insurance to make more consistent donations. With this type of policy, in addition to a guaranteed death benefit, you can also rely on cash value to generate capital that can also be used for charity.
Among the types of permanent insurance, there are many possible strategies. If you would like to name the organization as the beneficiary, traditional or ordinary life insurance might be enough. This is a stable product that can be managed very easily and provides a good payout, in addition to attractive cash value.
However, if you’d like to donate the whole policy and name the charity as the owner, you might opt for a more sophisticated product. In this case, variable or variable universal life insurance might be the best option. These policies generate more income thanks to riskier investment vehicles--but they can also generate losses.
If you decide on this last option, we suggest you come to an agreement with the organization and make sure they know you’re donating a more demanding instrument. This way, if they accept, their managers can make the right decisions to get the most out of this policy, with investments tailored to their goals.
In the end, regardless of the option you choose, giving to charity can be an excellent way to use your life insurance. Whether you decide to purchase a policy to donate it, or your financial situation has improved to the point where you no longer need as much protection and can give away your policy or payout, you will be helping someone while also benefitting from a first-rate protection tool.