Most of us have life insurance policies to provide for our heirs when we die, but there may come a time when this is no longer a consideration…when, for example, your children are grown and providing for themselves. You could cancel your life insurance policy, or you might want to consider donating it to charity. There are two ways you can do this:
The charity becomes your beneficiary
One way to do this is to name your favorite charity as the beneficiary of your policy. The advantage: You retain access to any cash value remaining in the policy, and you can always change your mind about the beneficiary later. The downside: You don’t get an income-tax deduction.
If you actually transfer ownership of a life insurance policy to a charity, you’re eligible for a charitable deduction for the policy. This means you can deduct whichever is less: the policy’s fair market value, or the basis. Your basis comprises the premiums paid until the date of the transfer less dividends and withdrawals you have received, as well as any loans taken against the policy that haven’t been paid off.
If you elect to continue paying premiums to keep the policy in effect – something you’ll have to work out with the charity itself – you’ll get a deduction for those premiums as well. The deduction depends on how you pay your premiums (to the insurance company or to the charity), and it can vary from 30 percent to 50 percent of your adjusted gross income.
If arranged properly, this strategy will benefit you as well as your favorite charity. But it can get complex. For example, your other charitable donations may lower your deductions, as noted above. To ensure you maximize the benefits for you and the charity, it’s a good idea to consult your advisor before signing over your policy.