Combine Charitable Giving & Life Insurance: Best Advice - Tax Professionals Member Article By Rosovich & Associates, Inc.
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Combine Charitable Giving & Life Insurance: Best Advice

Combine Charitable Giving & Life Insurance: Best Advice

Tax exemption has risen to over $5 million in the past years. The rise has reduced the need for life insurance for families struggling to pay estate taxes. But you can still enjoy insurance benefits through your financial plan by including charitable remainder trusts (CRTs) and other charitable donations.


How It Works

Your contributions to charity work can qualify you for tax benefits. Most states' laws accept the benefits of combining charity with life insurance. One benefit is that you're paying a deduction to the IRS while keeping a lump sum for your family by giving to charity. Another advantage is benefiting from the income tax deductions for life. You must plan to merge your life insurance with your charity work beforehand. 

This can happen in two ways:

Give Away Your Existing Policy

Giving away an outlived policy is a start. The strategy is available to existing policies that have served their primary purpose. You can give up such a policy if it is no longer liquidated or taxed. The policy is usually given outright to charity or donated to Donor Advised Fund (DAF). 

A charity outright enables you to change the policyholder or other essential information. At the point of performing charity outright, tax deduction plus unearned premium is under the interpolated terminal's scrutiny. The premium needed is handled by the charity group, but you can also help by;

  • Making the premium payment by gifting the premium to the group.

  • Make the premium payment directly to the charity to pay the insurance company. The offer is considered income tax-deductible.

  • Paying the premium by converting the policy to a reduced and paid-up value before gifting it to the charity.

Every charity loves a gift with an already paid premium. The situation exempts the administrative burden of mailing every paid premium receipt to the donor. Also, both the donor and charity will be free of future premiums. However, there are limitations to free stuff. Any amount above $5,000 will require a Qualified Appraisal. Also, the appraisal form must be signed by a neutral third party. 

2. Give a New Life Insurance Policy

Another option is to opt for a new life insurance policy. Although, there should be an added insurable interest by the donor if the charity is to own the gift. This requirement mostly favors those with a strong relationship with the charity. In such a case, you can make the premium entirely at the start or keep making payments when needed. You can have more control over the policy, or if you have issues with the premium, the option is to name the charity as the beneficiary. You can enjoy this benefit by;

  • Putting the charity as a whole or partial beneficiary. You can give part of the donated gift to your family or heir, then the rest to charity. Also, you can change the existing or new life insurance policy to a charity organization. 

  • A life insurance trust is another way to keep the policy by putting the charity as the beneficiary. This will make death claims easy to divide between those involved. 

Suppose you intend to make changes to your life insurance policy; first, review your financial plan to see a need for the policy. During this time, ensure your existing policy remains intact and functioning. The reason for requesting the insurance must be genuine, and the charity should be fully informed of this reason before getting the policy. However, not all charities accept this offer but many welcome this idea. 

Do the planning beforehand and make sure the planning aligns with your goals and needs. This is required to avoid handling the needed policy and getting the useless one.


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