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Donating Life Insurance

Donating Life Insurance

It’s possible for philanthropic-minded clients to donate their life insurance to charity and get an attractive tax deduction.

And not just for high-net-worth clients. Say your client paid in $50,000 in premiums for a $300,000 death benefit over the years. When the client dies, the charity may get that death benefit or more, depending upon the nature of the policy. If your client donates a second-to-die policy, for example, the death benefit could be more than twice that amount.

“If someone is charitable, it does not matter if a person has a higher or lower net worth,” says Lisa Schneider, trust and estate attorney with Gunster, Palm Beach, FL. “Life insurance is often a forgotten asset people got at an earlier stage in life.”

Yet there are tempting benefits for the rich as well. Schneider says persons with a net worth greater than $10 million frequently purchased life insurance policies to help minimize estate taxes. However, thanks to recent changes in the estate tax laws, they’re finding themselves over-insured for estate taxes.

It could pay to donate the excess coverage to charity. But clients need to consider all the tax consequences. The big one, of course, is whether the donation is irrevocable or not.

Those who want anonymity can change the beneficiary designation in the policy contract to the name of the charity. However, if your client still maintains control of the policy and can later change the beneficiary, the donation is considered revocable. Revocable gifts are not subject to a tax deduction by the donor and remain part of the policyholder’s taxable estate.

Another option is to make the gift of the policy to charity irrevocable. This way, the donor gets a tax deduction, based on an IRS calculation called “interpolated terminal reserve value” of the policy, Schneider says. This calculation takes into account the policy’s cash surrender value. In addition, the insurance proceeds are excluded from the donor’s taxable estate if the transfer was made more than three years prior to the donor’s death.

There are several ways to donate a life insurance policy to charity, according to the Planned Giving Design Center, Monroe, NC.  


  • A policyholder can gift an existing policy. Depending on state insurable interest laws, a charity can purchase a life insurance policy on the donor and pay the premiums.
  • A policyholder can donate the policy dividends to charity and get a tax deduction.
  • An individual with a group term life insurance policy received as an employee benefit could name a charity as a beneficiary for coverage over $50,000. This way, the donor not only makes a significant gift to a charity, but also may avoid paying income tax on the amount over $50,000 of coverage paid by the employer.
  • Donors who contribute insurance policies that are not fully paid up can make annual gifts to the charity, which may use contributions to pay premiums.


Leonard Witman, a Florham Park, NJ, tax attorney, suggests that the high net worth may pay the premiums on a life insurance policy, get an income tax deduction and make the charity both the owner and beneficiary.

“A charity can ask you to make an annual pledge to pay the premiums,” he says. “It works clean and simple.”

Another option is a charitable remainder trust, which both Witman and Schneider recommend. The client gives cash, securities, real estate, tangible personal property or other property interest to a charitable remainder trust for future use by a charity. The donor receives annuity income, joint lifetime income or at least 5% of the initial value of the gift, which is used to purchase life insurance. The client gets an income tax deduction based on the gift. The proceeds of the policy go to designated beneficiaries when the policyholder dies. But the charity keeps the remainder of the assets already donated.

If your client intends to donate a newly purchased policy, be sure he or she gets a “waiver of premium” rider. With this, the insurance company pays the premiums if the policyholder becomes disabled and can’t pay for coverage.

Also, some insurance companies offer riders to policies with face values over $1 million. So when the policyowner dies, 1% to 2% of the face value can go to a qualified charity.

Witman says advisors need to check their state’s insurable interest laws before naming beneficiaries, particularly if the transaction involves premium financing and coverage split between a charity and a family. Otherwise the insurance company may refuse to pay out the death benefits.

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