An aspect of estate planning that is typically overlooked is charitable giving. Many of us are very passionate philanthropists who like to support numerous causes. Why would you give money out of your estate when with some forethought you can use a life insurance policy to enhance your donation and give a much large gift and get a much larger tax benefit?
Consider this example, I could put away $10,000 each year for the next 10 years and earmark that $100,000 in my will as a charitable donation, or I could purchase $100,000 worth of life insurance benefit. My permanent life insurance policy would cost approximately $3700 per year for the next 10 years. By planning my charitable donation with life insurance, I will save $63,000.
There are three ways of getting the insurance benefit to the charity of your choice.
- Bequest in a will. An individual would name their estate as the beneficiary to their permanent life insurance policy with their will stipulating which charity or charities that donations be made to. Upon the death of the individual, a tax-free benefit payment will be made by the insurance company to the estate, and these funds will in turn be used to make the charitable donations based on the directions outlined in the will. In this situation, the charity issues a donation receipt to the estate for the amount they received, which would then be used to reduce the tax liability of the deceased for the year of death, benefiting their estate.
- Designate a charity as the beneficiary of a life insurance policy. In this situation, you would purchase a life insurance policy in which you are the owner and designate the charity as the beneficiary. Upon your death, the death benefit is paid by the insurance company directly to the charity, by-passing the estate and probate fees. Similarly, as above, the charity would issue a donation receipt to the estate for the amount they received, which would then be used to reduce the tax liability of the deceased for the year of death, benefiting their estate.
- Transfer ownership of the life insurance policy to the charity. In this scenario, the individual makes a gift/donation of their existing life insurance policy to the charity by transferring the policy to the charity. The charity will then become the owner and beneficiary of the life insurance policy and the individual would continue to pay the premiums. A charitable tax receipt for the cash value of the policy would be issued and you would continue to receive annual tax receipts for further premiums paid each year. Upon the individual’s death the charity would receive the tax-free death benefit but no donation receipts would be issued to the estate.
In the first two scenarios, you as the owner maintains control over the policy and therefore you can make changes to the beneficiaries, as well as have access to the cash value of the policy. In the third scenario, the charity is the owner of the policy and controls the policy and has access to the cash value. No matter what option you choose, the legacy you can provide a charity will be significantly increased by using life insurance to give.
Planning your charitable giving using life insurance can ease the work of the executor of your will, decrease your final tax bill, save you money and give you some peace of mind because you won’t have to worry about spending the money you earmarked for charity.