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 you can also 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 pillow for the final time. Whoever 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 in cash value.
Gifting life insurance to a charity
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 for your life insurance 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.
One thing to make sure of, is that you were honest when applying for your life insurance policy, as you don't want your life insurance to not pay out. Otherwise, they have cause to decline your claim.
Are there tax advantages to gifting life insurance to charity?
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. 🎁 For estate tax purposes, this is a great thing to consider.
In general, money in your estate is different and you may have to pay tax on it. However, if you don't put your life insurance policy in trust, there is an exception to this rule - which is if you’re giving money to charity. Any charitable donations will be deducted from your estate before any tax calculation is made, therefore tax free.
Why you should inform a charity beneficiary of your wishes
While it's just kind to let the charitable organizations that you want to gift. When a charity knows that they are receiving a charitable donation from a life insurance policy, they will have some financial security. Also, if the gift exceeds £5,000 or if you're looking to give a specific asset it's best to let them know ahead of time. This gives them the ability to make sure the death benefit process is seamless and they have the ability to see any foreseeable complications, such as not being able to accept the property you would like to donate.
Also, charities love to meet their donors and make sure that either a relationship is built or they can at the very least express their gratitude in person. It's also a great way to make sure your life insurance gift ends up being used in the way you envisioned. You may have a specific vision for it and speaking with the charity beforehand will make sure that you are both clear and that it can actually happen on their end.
Another reason to inform them is to get the organization's full legal name (which often may vary from their commonly used names), and an Employer Identification Number (EIN) or Taxpayer Identification Number (TIN). You can find most of these on their website, but sites such as Charity Navigator could help as well.
Steps to naming a charity beneficiary
There are a few things to consider when wanting to put some charitable giving into your life insurance and estate plan. Make sure you know who you want to support, what gift you'd like to leave and how to put the death benefit into a trust and estate plan. ✍️
Identify the charity or cause you want to support
Knowing the exact charity or cause you want to support will help your gift from the insurance policy go farther faster. As mentioned above, you will need exact details to be able to leave this gift and transfer ownership to the specified charity in your life insurance policy.
Determine what type of gift you’d like to make
In your life insurance, you can leave different kinds of gifts. For a charity, you can leave:
- a specific dollar amount, in cash value
- a percentage of your total estate (taxable estate)
- specific items or assets (properties, stocks etc.)
Write your policy into trust
When looking for legal advice, one thing that may come up is about putting your life insurance into trust. This is to make sure that the gift is not in a taxable estate, and that everyone (including the charity and your loved ones) gets the most out of the gifts and life insurance policy.
Include your gift in your estate plan
To make sure that your gift is tax free, the last step is to put your gift in your estate plan. For gift tax purposes, you need to put it in your estate so you know for a fact they will get what is intended.
Either your insurance company can help you with this, or you may even be able to go directly to the charity itself to make sure that the gift is in the right place.
Alternatives to leaving money to charity
Community foundations or public charities are a great way to leave money and make an impact on a specific geographic area. Rather than just a charity, these foundations receive a lot of their financial security and help through grants which your money can go towards.
These are used for larger assets, specifically higher-value ones. Life insurance donations can help provide support to a wider range of beneficiaries in a simple, safe and tax-friendly way.
This last way is a completely separate entity created for charitable reasons. These foundations are under direction from an Executive Board and are used to support the whole foundations mission at a high level.
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. 💬