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| Should you give life insurance to charity? | |||||||||||||||
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We all know you cant take it with you, so donating your life insurance policy can be good for a charity -- it gets the cash -- and for you. But it can also backfire.
By Insure.com Is it a good idea to sign your life insurance policy over to a charity? Depends on your motives. Depends on the policy. Depends on the charity. While many people donate entirely for altruistic reasons, charitable donations are tax deductible even with passage of the new tax bill. If that's one of your motives for signing away the benefits of your life insurance policy, you should first confirm a few things. First, be sure that the organization actually has nonprofit status -- that it's a 501(c)(3) organization. The organization should be able to show you its certification. Then talk to someone at the organization to make sure it will accept the life insurance as a gift. This is an important question, because some charities find the policies are more trouble than they're worth. There is another critical thing you must do: To take a deduction, you will have to make the charity both the owner and the beneficiary of your policy. If you name the charity as your policy's beneficiary but not the owner, then the IRS won't let you deduct the cash value of your life insurance policy from your taxes. Do you donate a term or whole life policy? Term life insurance policies cost the least, but they're also the least attractive to charities. Once the term expires on such a policy, it's worthless. Whole life policies cost more, but they have a cash value that builds up the longer you pay premiums on them. Thus, a whole life policy has some intrinsic value to it, although it's usually far less than the actual death benefit unless you've been paying into it for a long time.
If you donate a term life policy to a charity, you can deduct the cost of the premiums from your taxes. If you donate a whole life policy, you can deduct the cash value of the policy as well as the cost of the premiums. In both cases, once you die, the charity gets the policy proceeds. Those who might not want your life insurance According to folks who work in university development offices, most charities would rather be able to make use of a donation right away. If your goal is to fund scholarships and educate, a life insurance policy is not going to immediately serve that purpose. Larger organizations, such as major universities, have their own teams of money managers -- people whose sole purpose is to make the school's money grow. Chances are that such an organization's endowment fund would be better off investing the money you spent on the policy. Insurance companies are in the business of making money. The money they make off these policies is money the charity could be using instead. Here's an example: One large school accepts -- but immediately cancels and cashes in -- a whole life policy on a 41-year-old male donor. The policy had a $350,000 death benefit and a $20,000 cash value. If the donor lives 38 more years, the cash value must earn only 7.8% a year to grow to the death benefit value of $350,000. But if the school invests the $20,000 cash value in the stock market at an average annual return of 10.2% (the Standard & Poors 500's average annual return for the last 25 years), the donation will grow to nearly $801,550 in the same period. By canceling the policy and keeping and investing the cash value, the school will come out significantly ahead. Assuming that 13.3% annual return, the donor need live just 23 years before the university's investment grows to more than the death benefit. (Plus, the school has immediate access to the cash.) Think small So it's clear that larger charities can put that money to better use by investing it themselves. But smaller, local charities may not have those resources. And those charities are more likely to welcome any kind of contribution you offer. Still, it helps to remember that the death benefit of a life insurance policy won't be available to the charity until after you die. Most charities need the money now. Copyright insure.com. All rights reserved. | |||||||||||||||
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