When you take out your life insurance policy, it’s usually with the intention of using it to support your family in the event of your death. However, your financial situation can change dramatically over time, and you may find that you no longer need your life insurance policy in the ways you had anticipated. Maybe you’ve saved up enough to cover your funeral costs and paid off your debts, and your children are financially secure. In this case, you may want to consider other options for your life insurance policy.
One option is to donate your life insurance policy to a charity. You might be surprised to learn that this is a viable option for a life insurance policy you no longer need. Many people don’t consider this choice, but it’s a great way to ensure that a high-value life insurance policy doesn’t go to waste while supporting a cause you care about. Here’s how to donate your life insurance policy to charity and why you might consider it.
How to Donate Your Life Insurance Policy to Charity
Donating your life insurance policy to the charity of your choice is actually very simple. If you want the charity to receive the money now, you can transfer ownership to them and make them the beneficiary. This gives the charity control over the death benefit. They can continue to pay premiums on the policy and cash it out later, or they can opt to cash out the death benefit now and use the money immediately. If you go this route, you’ll get a substantial tax deduction that year.
If you want to give your life insurance policy to a charity after you die, you can keep ownership of the policy but make the charity the beneficiary. Changing the beneficiary of your policy is very simple to do, and when you do pass, the charity will have access to the death benefit. If you go this route, it’s very important to inform the charity so they can plan ahead financially. They may ask you to designate what you’d like done with the money. This option is better for those who are concerned that their financial circumstances may change in the future. This way, you can change the beneficiary again in the event of a financial emergency. However, it’s important to note that you won’t get a tax deduction in this case.
Although the process of donating your life insurance policy to charity is fairly simple, you may find yourself wondering where to start. Contact your life insurance agent or financial advisor – they can guide you through the process of transferring your policy. They’ll also ensure that this transfer is done without any errors, so that you can feel confident in your decision.
What Are the Benefits of Donating Your Life Insurance Policy to Charity?
There are a number of benefits to donating your life insurance policy to charity. Even if you’re financially stable, it’s not always feasible to make a significant donation to the organizations you care about. By donating your policy, you’re giving them a large lump sum that you likely wouldn’t be able to give under normal circumstances. Helping the causes you care about is incredibly rewarding and can make a huge impact for those who are less fortunate.
Another reason why you might consider donating your life insurance policy to charity is for the tax benefits. When you make any kind of charitable donation, you’ll be able to make a corresponding tax deduction that year. Usually, this tax deduction will be equivalent to the total of all of the payments you have already made on the insurance policy – this is called the tax basis or cost basis. However, if the cash value of your life insurance policy is lower, you may need to deduct that instead. You may want to consult a tax advisor or other financial professional for help making such a large deduction.
Is Donating to Charity the Right Option for Me?
Donating your life insurance policy to charity can be a great choice, but it isn’t necessarily the best choice for everyone. Here’s when you should consider donating your policy to charity.
- You have money set aside for your funeral arrangements and other relevant end-of-life expenses.
- You have paid off all of your debt. This includes mortgage debt, student loan debt, credit card debt, tax debt, and any other money you may owe.
- Your children or other dependents are now financially stable and no longer rely on you for support.
- You have substantial savings to cover any unexpected expenses.
- You have a charity that you are passionate about and would love to contribute a large sum to.
- You can benefit from the tax breaks that a large charitable donation would provide.
Generally, people take out life insurance policies to cover their financial responsibilities after they pass away. If your life circumstances have changed and those responsibilities are no longer there, donating your policy to charity will ensure that it doesn’t go to waste and that the money goes to a cause you care about.
However, there are some circumstances where donating your policy to charity might not be the best option. Here are some of the indicators that you should hang on to your policy, at least for now.
- You still have debt that you are paying down.
- Your income or your financial responsibilities fluctuate regularly.
- You’re anticipating a big life change, like buying a new property or having children.
- One or more of your dependents is not completely financially stable on their own.
- You don’t have enough savings to cover your end-of-life expenses comfortably.
In this case, you may end up needing your life insurance policy in the future, even if you feel financially stable now. If you’re not sure whether you should make a donation or not, talk to an insurance agent or a financial professional about the best options for you.