What is Charitable Gift Life Insurance?
Charitable gift life insurance is life insurance purchased with the intent of leaving all or a portion of the death benefit to the policy owner’s charity of choice.
How to set up charitable gift life insurance
When you buy a life insurance policy, you get to determine who will get the policy’s payout when you pass away. If you want to leave a legacy behind, naming a charity as the beneficiary of your policy provides them with a large lump sum when you die.
Plus, in many cases, the amount you’ll pay in premiums will be less than the death benefit payout. Buying life insurance and naming the charity as the beneficiary allows you to leave them with a potentially larger sum than if you donated that money to them directly.
There are a few things to be mindful of when establishing a charitable gift life insurance policy, though. For starters, you’ll want to gift your death benefit to a qualified 501(c)(3) charity. That helps to ensure that the death benefit is excluded from your taxable estate.
You’ll usually need the charity’s tax ID number to name them as a beneficiary in your policy details. Additionally, some insurers also want to see a history of giving to that charity before they’ll allow you to name that nonprofit as your policy’s beneficiary.
Then, once your life insurance contract is in force, notify the charity that you’ve named them in your policy. That way, they’ll know to make a claim against the policy when you pass away, allowing them to collect the money.
Ensuring your legacy with permanent life insurance
Generally, if you’re establishing charitable gift life insurance as a legacy-building tool, it’s best to buy a permanent life insurance policy. This way, the policy terms will be locked in for your lifetime, ensuring you can afford the premium payments required to keep the coverage in force.
Plus, a permanent policy means you’ll have the policy’s cash value to access while you’re alive.
You can explore term life insurance, but your policy won’t come with a cash value component and at the end of the policy’s terms, your premiums will go up. This can make it challenging to maintain your policy, potentially risking the charitable gift to the nonprofit you’ve chosen.
Some people prefer to choose specific types of permanent life insurance called single-premium life insurance or limited pay policies. This way, you only need to make one premium payment or payments up to a certain date to guarantee the charity will receive your death benefit. These options come with high premiums, but they can also allow you to guarantee the payout to your chosen charity while you’re confident your budget allows you to make the required payments.
Distributing your death benefit
Charitable gift life insurance is at its simplest when the policy owner directs the entirety of their policy’s death benefit to a single charity. But that doesn’t have to be the path you choose.
You can also distribute your death benefit across multiple nonprofit organizations. Alternatively, you could designate a portion (e.g., a certain percentage) of the policy’s benefit to go to your chosen charity, while distributing the remaining portion to family members or other heirs.
As you’re nailing down these policy terms, your insurer may offer you the option to keep beneficiary identities anonymous. If you have any concern that family members or business partners you leave behind could contest the way you’ve distributed your death benefit, keeping things anonymous can help you protect the charity from time spent in probate court.
Irrevocable vs. revocable charitable beneficiaries
When you establish your life insurance contract, you can choose to name the charity as a revocable or irrevocable beneficiary. If you name them irrevocably, you won’t be able to make changes to the policy, including how its death benefit is distributed, at any point in the future.
Naming them a revocable beneficiary builds in some flexibility if your situation changes later in life.