Can You Name A Charity As Your Beneficiary? Making Donations With Your Insurance Policy
A life insurance policy is generally meant to provide your loved ones with financial protection after you pass away. However, your family isn’t the only ones who can benefit from your insurance death benefit. If you have a favorite charity, they can benefit greatly from being your insurance policy’s beneficiary. Not only that, using your insurance policy to donate can help you build a better estate plan and enjoy benefits on your income taxes!
In this guide, we’ll explain how you can donate your insurance death benefit to charities! We’ll discuss how charities can benefit from being an insurance beneficiary, the steps you need to take in order to do so, as well as tax implications related to your insurance donation.
Why Make A Charity Your Beneficiary?
People donate for various reasons. You might donate to a charity because you want to help others, or perhaps you might donate to hospitals and health care facilities to support their services. In fact, surveys show that over a quarter of Americans bought life insurance to provide a charitable gift to their favorite charities.
If you have a charity that you’ve supported during your lifetime, you can grant them one last gift by giving them your insurance payout. If you don’t have heirs that can benefit from your life insurance payout, giving it to charity is one of the best options to make sure your funds don't go to waste.
How You Can Benefit From Donating Insurance Proceeds
Simply naming a charity as your insurance beneficiary doesn’t reduce your taxable assets, granting you no estate tax benefits. You can’t write off your premium payments as a deduction to your income taxes, either. However, donating your policy’s proceeds can reduce the income taxes you pay as well as help with your estate planning.
Donating your policy’s proceeds reduces your taxable assets, which means your heirs will pay fewer estate taxes when you pass away. As a tip, you can only enjoy these tax and estate planning benefits if you donate a policy that provides lifetime coverage.
How Charities Benefit From Being Your Beneficiary
One of the main advantages of naming a charity as a beneficiary is that it’ll earn more compared to individual cash donations. For example, let’s say you have $100,000 that you can either donate to a charity or put into life insurance. If you put it into a whole life policy, that $100,000 will become a $250,000 gift free of income taxes to your favorite charity upon your death.
This method also works if you can’t make a large individual donation. If you only have $100 to spare every month, the charity will benefit more if you put it into a $100,000 whole life insurance policy. The amount of money they’ll earn after you pass away will be much larger compared to a monthly donation of $100.
If you would like to support a charitable organization but have limited assets, putting it into insurance is one of the most effective methods to multiply your donation’s dollar amount. While donating in any way is a good thing, donating your assets with a clear strategy will bring greater benefits to your charity beneficiary.
To further help you put your assets in the right place, most charities have a gift plan administrator. By consulting with them, you can ensure that your assets are going to be put to good use.
Do You Have To Donate All Your Death Benefits To Charity?
You’re not obligated to name a charity as the sole beneficiary of your insurance policy. When you’re given a beneficiary designation form by the insurer, you can dictate the distribution of your insurance payout.
You can name multiple beneficiaries on your beneficiary designation form – for example, your spouse and your favorite charity. You can also detail the distribution of your insurance benefits. This means that for instance, you can give 20% of your benefit to charity, and the remaining 80% goes to a family member. If you have multiple causes that you support during your lifetime, you can also split an equal portion of your benefit between them.
Another option is to name a charity as your contingent beneficiary. Contingent beneficiaries will receive your death benefit if your primary beneficiary passes away. So for example, if your spouse is your primary beneficiary and they die before you, your insurance benefit will go to the charity you named as a contingent beneficiary.
How To Name A Charity As A Beneficiary
In this section, we’ll explain how you can ensure that your insurance payout will go to the charity you named as a beneficiary.
Identify Your Beneficiaries
Before you decide to name a charity on your beneficiary forms, ask yourself – what cause do you want to support the most? Once you identify the cause you want to back, look up organizations that work to champion that cause. To make sure that your money goes to the right people, make sure that the organization is legitimate. Look up their full legal name as well as their tax ID number.
Once you’ve named a beneficiary, the next step is to decide which level of the organization you’re supporting. In addition to the main national or international organization, charities may also have regional chapters or offices. It’s up to you to decide on your donation’s distribution – whether your assets will help the main organization or support local efforts.
Contact Your Charities In Advance
After you’ve decided on the charity, make sure that they know you’re planning to donate. Contacting the charity before you name them as a beneficiary will help you ensure that your funds go to the right individuals. Getting in touch with them will also help if you want your money to be used for something specific.
Letting them know in advance will also help reduce any unneeded complications when your insurance pays out and it’s time for them to receive the money.
Notify Your Lawyer And Heirs
In order to make sure the claims process goes smoothly, let your lawyer or family members know that you have an insurance policy that pays out to a charity organization. This is important because the insurance company needs your death certificate to process your claim.
Other Options To Donate Using Your Insurance
In addition to naming a charity as your beneficiary, you can also donate using your insurance through these methods. Some of these options are also beneficial to your estate plan.
Charitable Giving Rider
Insurance riders are usually bought as extra additions to customize your insurance coverage. One of the many riders that an insurer may offer you is the charitable giving rider.
If you have a charitable giving rider, the insurance company will make a donation to your chosen charity for free. This donation will be paid out upon your death and usually consists of 1% to 2% of your coverage amount. Your main death benefit won’t be affected by this donation, so your beneficiaries will still receive the full coverage amount. However, not all insurers offer these riders – and the ones who do usually offer them for high-value policies.
Another stipulation of this rider is that the charity of your choice must be recognized by the IRS as a tax-exempt nonprofit organization. These nonprofit organizations usually include charities focusing on health, private foundations, as well as literary and arts organizations.
Donating Through Trusts
Another option to donate using your insurance is by putting the payout into your trust assets, managed by a trustee. Because a trust requires the trustee to use its assets according to your wishes, you can be sure that your funds are used to support the charities that you designate as trust beneficiaries.
Another benefit of having a trust is that it can help with your estate plan. By placing your assets into a trust, you minimize your estate’s value. This will lower the estate tax obligation levied on your heirs.
Donating An Active Policy
It’s possible to donate an entire whole life policy to charity while you’re alive. By giving the charity your policy, they become the policyholder and beneficiary. Once they have the policy, they can either liquidate the policy immediately to take the cash value, or keep the policy active to grow it further. If the charity chooses to keep the policy active, you can help pay the premiums by donating to them.
Donating an active permanent insurance policy could result in an income tax deduction. You can qualify for this income tax benefit by making your charity the account holder of the policy. This method is also beneficial to your estate plan. By reducing the value of your assets, your estate tax will be lower.
Gifting Your Dividends
If you own an insurance policy with an investment component, you can choose to donate the dividends earned from investing. Donating your policy’s dividends is an option that still allows you to contribute to your chosen charity while still keeping the policy for yourself.
Naming a charity as a beneficiary of your insurance policy can help you make a larger contribution to your charity. In addition to multiplying your generosity, you can also enjoy a tax deduction and help build your estate planning strategy.
Depending on your commitment to the charity, you can also split your death benefit between them and your family. There are also other methods that you can look into if you want to make donations using your life insurance.
Looking to make a contribution to your favorite charity using life insurance? Wesley Insurance, LLC is here to help! Our team of professionals will help advise you on how you can maximize your donations by leveraging your insurance coverage. Contact us today for more information!