Guide to Charitable Gifts of Life Insurance

Woman's hand signing application for life insurance


Gifts of Life Insurance can strike fear in the heart of even the most stalwart Gift Planner. It’s a complex asset and can seem intimidating, but with a few key pieces of knowledge you can master it. 

The Basics

Life Insurance comes in two basic types – “term” and “permanent”.

Term is kind of like your car insurance. You pay premiums to cover financial loss. If you continue to pay your premiums, the insurance is there to protect you. If/when you stop paying premiums the policy is cancelled. The premiums you pay are solely to cover the cost of insurance. Term insurance expires after a certain period of time – 1 year, 10 years, 20 years. You can purchase insurance for the period of time you need it. If you want to renew it, you re-apply. 

Permanent insurance provides protection from financial losses, but it also includes an additional component. That additional component is kind of like a savings account. The premiums you pay cover the cost of insurance AND some of the premium is set aside to be invested. As long as you continue to pay premiums as they are required, the insurance is there to protect you. It doesn’t expire like term insurance does. At some point in the future, the invested portion could be available for you to withdraw. It’s called the “cash value”. 

In both cases, if the insured person dies with the insurance in place, the amount that is paid to the beneficiaries is called the Death Benefit. The death benefit is a set amount and generally doesn’t change once the policy is put into place. 

Permanent Life Insurance is typically the kind that people donate. Term can be donated, but the charity only receives a payout if the donor passes away before the term ends.

Ways to Give

There are two basic ways to give life insurance to charity. 

First, you can name a charity/charities as full or partial beneficiary of the policy. When the insured person passes away, the death benefit is paid out to the beneficiaries. A donor can name both family and charity as beneficiaries of the same policy. She continues to own and control the policy, so she can change her mind and alter those beneficiaries. No income tax charitable deduction is available, because she continues to own and control the policy. Upon her death, the death benefit going to charity may be claimed as an estate tax charitable deduction. 

Second, you can donate the actual policy to charity. Old or new policies can be donated. If a donor has a policy she no longer needs, she can donate it. If she likes the idea of giving insurance as a charitable gift, she may purchase a new policy and donate it to charity. In either case, there may be ongoing premiums required. If the donor continues to pay those premiums after the policy is donated, they may be claimed as an income tax charitable deduction. When an existing policy is donated, it may have some “cash value”. That may entitle the donor to a charitable deduction, but the policy must first be appraised if the cash value is in excess of $5,000. Charitable Solutions does a nice job appraising life insurance policies and the price is reasonable. 

The basic premise behind donating a policy is that the donor makes regular premium payments over time and at the end of her lifetime, the death benefit is much larger than the sum of all the premiums paid. This can work well if the math pans out. If the donor lives a very long time, they could end up paying more in premiums than the death benefit is worth. It’s best if the policy doesn’t require the donor to make premium payments for their entire life, but rather requires premiums only for a set number of years. I’ve seen several cases where the donor goes into a care facility and is no longer able to pay the ongoing premiums. 

To Accept or Not to Accept

Now that you have a firm grasp on the basics of donating life insurance to charity, you’ll have to decide whether your organization wants to accept life insurance gifts. 

If a donor names your organization as beneficiary of a life insurance policy, there is virtually nothing you need to do, except steward the donor, until they pass away. At that time, you’ll likely need to file a death claim form along with a certified copy of the death certificate with the insurance company. This is a pretty risk-free kind of gift that any organization can handle. 

If a donor wants to donate an actual policy to your organization, you will have some administrative duties to perform. 

  1. Before you accept the gift, be sure to request an “in-force illustration”. It will give you all the vital data on the policy to allow you to determine whether you want to accept or not. 
  2. If accepted, send the donor a gift receipt for the gift of the policy. It shouldn’t include any values – just the basic information such as gift date, policy number, and insurance company. The gift date is usually the date the policy is “assigned” to you. 
  3. Make sure your organization is named BOTH owner AND beneficiary of the policy;
  4. Send the donor a gift receipt each time they make a premium payment;
  5. Keep an eye on the policy to make sure premiums are being made and the policy is healthy. You may want to work with an experienced insurance professional to help you review policies on an ongoing basis.
  6. When the donor passes away, file a claim form and certified death certificate with the insurance company. 

If you decide you DON’T want to accept gifts of policies, check with your local community foundation to see if they would accept the gift on your behalf and take care of the administration. Some are happy to do this for charities in their community. 

Special Situations

What if you DO accept a policy and the donor is no longer willing/able to pay ongoing premiums.  If you run into this situation, there are some options. 

  1. Charity Pays: Generally, it’s not a great idea for charities to pay these premiums, but you can do it. Premiums can be an expensive drain on your cash flow.
  2. Liquidate the Policy: Since your organization owns the policy, you can choose to liquidate it, take that cash value and put it towards your charitable mission. 
  3. Convert to “Reduced Paid-Up”: This will discontinue any ongoing premiums, but the death benefit will likely be reduced. The insurance stays in place and you will still be able to claim the death benefit upon the donor’s passing. 

Whatever you decide to do, it’s a very good practice to maintain an open conversation with the donor and/or her family to let them know there are options. The worst thing to do is to do nothing and let the insurance lapse. If you do that, the charity gets nothing and all the money the donor has paid in premiums goes to waste. 

I hope this article has given you a clearer picture of gifts of life insurance. It can be a great gift if done properly. It can also be administratively burdensome, so make sure you’re prepared. 

Get prepared for your next gift of life insurance or any other asset with my new book, Turning Wealth Into What Matters and online School for Non-Cash Gifts. 

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