Posted by James Financial Services Inc

Some Strategies for Charitable Giving With Life Insurance

Some Strategies for Charitable Giving With Life Insurance

Charitable life insurance donations offer a way to raise funds to increase donations and reduce taxes.

This is a less common strategy. There are a variety of tax considerations and strategies, depending on your specific goals. Let's cover them in detail.

Current Charitable Giving Statistics

Bequest gifts represent 9% of all funds donated to nonprofits in the United States. It hit a record high of $35.7 billion in 2018.

There are some interesting trends, and we have seen some changes since the changes that were made to property tax law in 2018. It is believed that increasing non-taxable assets will reduce charitable donations with fewer incentives to minimize one's estate tax burden.

We'll see how it develops.

In the meantime, we know that fewer Americans are donating to charity. However, the amount Americans donate each year continues to grow. In short, a bulk of the charity donations comes from fewer people donating more.

Anyways, let's focus on some strategies for charitable giving with life insurance.

Six ways to donate through life insurance

Some of these methods are simple. They provide tax benefits and limit the chaos that can arise on a property when heirs contest wills. You can also keep private donations, as life insurance doesn't have to go through probate and avoid public court records completely.

Some of these strategies provide a way to get rid of an old policy that you no longer need. Other methods will be to enter into a new policy, which usually requires a trip to the doctor for medical examination.

Name a charity as the beneficiary of your existing policy: It's simple. It's an easy way to ensure that some of your life insurance proceeds go directly to charities. The distribution cannot be challenged because life insurance is a legally binding contract.

Life insurance policies offer the possibility of designating several beneficiaries. You can also assign a percentage of the benefits to each beneficiary. The portions do not have to be the same. For example, you can configure it like this:

  • 25% to spouse

  • 50% split equally between children

  • 25% for charity

You can also split it among several charities if you wish. How you split your life insurance benefits is up to you as the policyholder.

Charitable Giving Riders

Some insurance companies let you add a charitable donation clause. Most of the time, this rider does not increase policy premiums.

The insurance company automatically pays 1% (sometimes 2%) of the death benefit to the charity on your behalf when someone makes a claim. You chose any charity at the time of application, but you can change it later.

The advantages here are that donations are automatic, cost nothing, and do not reduce the amount that goes to your heirs.

Gift Policy Dividends

It's fun and easy. Although there is one big problem, you should be aware of.

The first method is to claim cash contributions and then donate that amount each year. There's money barely touching your bank account, so it doesn't look like a loss. However, this takes work on your part.

The second method uses dividends to pay for a second life insurance policy. The only difference is that the charity will own this second policy, and the dividends from the first policy will pay for the first.

The problem here is that policy dividends often go to things like cash or can prevent a policy from expiring if it suffers a financial tragedy.

Transferring Ownership of the Policy to Charity 

This method benefits all parties involved. The charity decides how best to use the policy for its current needs. They can collect it immediately, save it for a larger donation later, or even enjoy the policy's cash value while retaining it.

As the previous owner, you may have a life insurance policy that you no longer need.

You get a tax deduction when you donate your policy to a charity. Instead of charging a residual value, there can often be a financial benefit to minimizing the tax burden.

Depending on the charity's preferences, they may take over the premium payments, or you may continue to pay the premiums. If you continue to pay premiums, the Internal Revenue Service considers each premium payment a charitable donation.

Charity Remainder Trust/Charitable Trust Beneficiary

Charitable remainders often work in conjunction with property replacement funds, but they can work alone. It all depends on your goals. Most people choose one of two types:

  • A charitable remainder annuity trust

  • Charitable remainder unitrust

In a charitable remainder trust, donate assets to the irrevocable fund. You can sell assets without capital gains tax, which means more profits to reinvest. The trust then pays you a certain distribution for the rest of your life using the proceeds from managing the assets you transferred.

In short, it provides a lifetime income stream, and when you die, all the trust goes to the so-called charity.

Wealth Replacement Trust

Most people choose to combine the remaining charity fund with wealth replacement trust. All assets go to charity with the remaining charity fund and not to the family upon your death.

Estate Replacement Trust offers a form of estate tax to ensure that your life insurance can also benefit your family.

Insurance agents create wealth replacement funds as irrevocable life insurance funds. The trust will purchase life insurance for you. Make donations to the trust each year, which will be used to pay life insurance premiums.

The trust is also the beneficiary of the policy and the owner. This way, the benefits never reach your property and can be transferred privately to your heirs, spouse, charity, or anyone else.

Tax implications of donating with Life Insurance

When making a charitable donation through life insurance, a tax professional must be involved. You have to follow all kinds of special rules to keep the IRS happy. Since each method of charitable contribution has its own tax particularities. Talk to an expert with experience in this area.

When you donate a policy to a charity, you can claim a tax deduction of up to 50% of adjusted gross income. You can also deduct the money you give to this charity each year to pay your policy premiums.

Qualified Appraisal of Gift

One of the biggest complaints from accountants about charitable donations of life insurance is that donors and charities often don't go through the screening process and are surprised when the tax deductions don't match up, as opposed to what they initially thought.

First, deductions are limited to the policy's fair market value or the lesser of the death benefit. The death benefit is simple. The policy's fair market value is usually the surrender value or cash value.

Before we dive into the details, any policy over $5,000 requires a "qualified appraisal of gift," according to the IRS. The donor pays for this assessment, preferably before the donation. This way, both the donor and the charity know what they are getting and how it affects their cash flow, assets, and tax burden.

Advantages and Disadvantages of Donating Life Insurance

The wide range of life insurance policies means the pros and cons vary by strategy. A financial advisor can be a valuable resource in learning about these strategies and their tax implications.


First, it can reduce the value of your property. One of the most effective methods used is an irrevocable life insurance fund. The money will still go to your heirs, but technically it won't be part of your fortune.

Secondly, you can make a larger donation than would otherwise make sense. A life insurance policy in which you pay less in premiums than in death benefits gives you and the charity an advance.

Third, families talk about money. It's a problem, but a common problem. Heirs fight over charitable donations. The executor can use funds set aside for a charitable donation to pay inheritance tax, increasing the heirs' share of the inheritance. It gets legally messy. Because life insurance is a contract, that money skips all legal procedures and goes straight to charities.


Some nonprofit organizations cannot afford to manage life insurance contracts, even if the donor continues to pay the premiums. They need team members who understand life insurance and know how to manage it.

Before choosing a charity to donate to, find out how it deals with life insurance. Many automatically cash out the policy instead of keeping it, so it doesn't have to deal with the administration.

The second, and perhaps most important, the drawback is that these strategies are complicated. When you give money to charities, it's easy. Life insurance, including policy ownership, insurable interest, and tax implications, requires someone who loves to understand finance or the help of a financial professional.


Donating to charities through life insurance is more complicated than setting up a recurring donation by credit card. However, there are great tax advantages for you and your property when set up correctly.

There are several options to choose from, depending on your risk tolerance and charitable goals.



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