When you create a life insurance policy, you’ll need to decide who the money should go to. Many people love the idea of giving to charity through your life insurance but can you do it? Yes! And not only can you give to charity through your policy, but it might be even more popular to give to a charity in your will.
What is a beneficiary?
The whole point of life insurance is to leave money behind after you’re gone, after you’ve hit the hay for the final time. Who inherits that cash lump sum will be known as your beneficiaries. Once your insurance company pays out, they are the ones who will receive the funds.
Making a charity my beneficiary
Many people think that the beneficiary of your life insurance policy has to be your closest family member. In reality, it can be anyone you wish. This can include friends, multiple beneficiaries, and any charity. 💏 As with any beneficiary, you will want to make your intentions very clear by giving their exact name and registered charity number.
You can have as many beneficiaries as you want and have specific amounts given to each. You can specify percentages to be left behind such as 80% to your spouse and 20% to your chosen charity. How you do this is completely up to you.
Leaving finances to charity in your will ✍️
If it’s left in trust, your life insurance policy is not going to form part of your estate. This means it doesn’t form a part of your inheritance tax calculations and the dedicated charity will receive 100% of the fund. 🎁
Money in your estate is different and you may have to pay tax on it. There is an exception to this and that is if you’re giving money to charity. Any charitable donation will be deducted from your estate before any tax calculation is made.
As a simple example, let’s say you have a property worth £325,000 (which is the inheritance tax (IHT) limit), cash worth £50,000 (therefore an estate worth £375,000) and life insurance valued at £100,000. (to learn more about IHT read this!)
Option 1: Giving £50,000 to a charity through your life insurance would mean that the whole of your estate (£375,000) would be liable to inheritance tax. In this situation, 40% of the £50,000 above £325,000 would be paid in tax, which is £20,000.
Charity gets: £50,000 Loved ones get: £405,000 (£355,000 in the estate, £50,000 of life insurance) Taxman gets: £20,000
Option 2: However, if your life insurance is put in trust, in your will, the taxman wouldn’t receive anything.
With this, all £100,000 of the life insurance is given to your loved ones. The £50,000 given to charity would be taken off the value of the estate and therefore there'd be no inheritance tax to pay. 🎉
Charity gets: £50,000 Loved ones get: £425,000 (£325,000 in the estate, £100,000 of life insurance) Taxman gets: £0
Also side note - this only makes sense if inheritance tax is potentially going to be an issue. If your estate is going to be well below the £325,000 threshold, then it doesn’t really matter where the charitable donation is coming from.
Leaving finances or another asset (such as a house etc.) to charity in your will allows your family to make all necessary payments and then give your charitable donation once probate has been granted. It can be easier for them to organise your finances in that way.
Should charity be one of your life insurance beneficiaries?
As we’ve discussed, there is no issue with naming a charity as a beneficiary on a life insurance policy. However, not all insurers will do this through the life insurance, only their will process. So make sure you know the restrictions and details before signing up for something.
One of the biggest benefits of a life insurance policy is that the money is going to be available almost instantly. This allows it to be used for clearing outstanding bills, paying funeral costs as well as clearing any Inheritance Tax. Want to learn more about Inheritance Tax and trusts? Our partner at James Pearson Estate Planning knows SO much and would love to answer any questions. Feel free to get in touch.
What we offer 👋
If you’re wondering whether you should give to charity, it’s always a good idea. It just might not be done in the same way for everyone. In some situations, you might give to a charity through your will rather than your life insurance. Others may prefer to give on a regular basis rather than in one lump sum. One thing I can tell you for sure is that charities appreciate these gifts more than we know and it’s so important for them to reach more people.
At Bequest, we currently only offer donating to a charity in your will. To learn more about how this works, read 7 Things to Know About Leaving Money to Charity in Your Will.