Donating Life Insurance to Charity: How It Works and Key Considerations

Life insurance is often seen as a way to provide financial security for loved ones, but it can also support charitable causes. Donating a policy or naming a charity as a beneficiary allows individuals to leave a lasting impact while potentially gaining financial benefits. Understanding how to structure such a donation ensures the donor’s intentions are honored and the charity benefits fully.

Tax Treatment of Donated Policies

The tax implications of donating a life insurance policy depend on whether ownership is transferred. If a policy is irrevocably assigned to a charity, the donor may qualify for a charitable income tax deduction based on the policy’s fair market value or the total premiums paid, whichever is lower. The IRS generally considers fair market value to be the policy’s interpolated terminal reserve, similar to its cash surrender value.

If the policy remains active and premiums are still due, additional deductions may be available for any payments the donor continues to make. These contributions are treated as charitable gifts and may be deducted in the year they are paid, subject to standard limits—typically 60% of adjusted gross income (AGI) for cash contributions and 30% for non-cash assets like life insurance.

Naming a charity as a beneficiary while retaining ownership does not provide an immediate deduction. The tax benefit applies only to the estate, as the death benefit is excluded from the taxable estate if the charity is the sole recipient. However, if the policyholder retains any control—such as the ability to change beneficiaries or borrow against the policy—the full death benefit may still be included in the estate’s value for tax purposes.

Policy Ownership Transfer Steps

Transferring ownership of a life insurance policy to a charity requires several steps. First, the donor must confirm that the charity is eligible to receive such a donation. Most 501(c)(3) organizations can accept life insurance policies, but some may have internal restrictions. Contacting the organization ensures they can accept the transfer.

Once the charity agrees, the donor completes a transfer of ownership form from the insurance company. This legally assigns all rights and control of the policy to the charity, meaning the donor can no longer make changes, borrow against the policy, or cancel it. The insurer may require written acknowledgment from the charity confirming acceptance, which is useful for tax purposes.

If premiums are still due, the donor must arrange for payment. Some donors continue making payments directly, while others donate cash to the charity to cover the costs. If the charity assumes responsibility, it must decide whether to maintain the policy or surrender it for its cash value.

Ways to Name a Charity

Instead of transferring ownership, a donor can designate a charity as a beneficiary, allowing them to retain control while ensuring the organization receives the proceeds upon their passing.

Primary Beneficiary

Naming a charity as the primary beneficiary means it will receive the full death benefit. This approach does not require immediate tax filings or ownership changes. However, because the donor retains ownership, the policy remains part of their taxable estate. If the total estate value exceeds the federal estate tax exemption—$13.61 million in 2024—any amount above this threshold may be subject to a 40% estate tax. Directing the entire payout to a tax-exempt organization can reduce or eliminate estate tax liability on the policy’s proceeds.

To prevent delays, the donor should provide the insurer with the charity’s full legal name, tax identification number, and contact details. If the policy has outstanding loans, these will be deducted from the death benefit, reducing the amount the charity receives.

Contingent Beneficiary

A charity can be named as a contingent beneficiary, meaning it will receive the death benefit only if the primary beneficiary—typically a spouse or family member—predeceases the policyholder or cannot accept the funds. This allows donors to prioritize loved ones while ensuring a charitable contribution if circumstances change.

This designation does not provide immediate tax benefits but ensures the policy proceeds do not go unclaimed or revert to the estate, which could increase estate tax exposure. If the primary beneficiary is a spouse, the death benefit is typically exempt from estate taxes under the unlimited marital deduction. However, if the spouse passes away before the policyholder and no new primary beneficiary is named, the charity will receive the funds, potentially reducing the taxable estate.

Donors should periodically review beneficiary designations, especially after major life events such as marriage, divorce, or the birth of children. If a charity is named as a contingent beneficiary, notifying the organization ensures they are aware of the potential future gift.

Partial Percentage

A donor can allocate a percentage of the death benefit to multiple recipients, including both individuals and charities. For example, a policyholder might specify that 70% of the proceeds go to family members while 30% is directed to a nonprofit. This allows for a balanced distribution of assets while supporting philanthropic goals.

The portion assigned to the charity is excluded from the taxable estate, while the remainder may be subject to estate taxes if the total estate value exceeds exemption limits. If multiple beneficiaries are named, the insurance company will distribute the funds accordingly, but any outstanding policy loans or debts will be deducted proportionally from each recipient’s share.

To avoid complications, the donor should specify exact percentages rather than dollar amounts, as the policy’s value may fluctuate. If the charity merges with another organization or ceases operations before the payout, the donor should have a backup plan, such as naming an alternative nonprofit or allowing the executor to redirect the funds to a similar cause. Regularly updating beneficiary designations ensures the intended distribution remains aligned with the donor’s wishes.

Required Documentation

Proper documentation ensures a life insurance donation is legally binding and recognized for tax purposes. The donor should obtain a formal written agreement from the charity confirming acceptance of the policy or beneficiary designation. This acknowledgment should include the organization’s legal name, tax-exempt status under IRS Code Section 501(c)(3), and a statement confirming the donor’s intent. Charities may also require a copy of the policy details to verify the expected benefit.

The insurance company will require a beneficiary designation form if the donor is naming the charity as a recipient. This must be completed accurately to prevent disputes or delays. Any errors in the charity’s name or tax identification number could cause complications, particularly if multiple organizations have similar names. Donors should request confirmation from the insurer once the beneficiary change is processed.

If the donor wishes to claim a tax deduction for contributions made toward an existing policy, detailed records of premium payments are necessary. The IRS may require proof in the form of canceled checks, bank statements, or receipts from the charity if the donor transfers funds directly for premium coverage. Maintaining these records ensures compliance with tax reporting requirements.

Coordinating with Estate Arrangements

Integrating a life insurance donation into an estate plan ensures the charitable gift is executed efficiently while minimizing tax liabilities. Since estate planning involves multiple financial instruments, including wills, trusts, and retirement accounts, coordination prevents conflicts or unintended consequences. Consulting with an estate attorney or financial advisor helps structure the donation to align with broader wealth transfer goals.

If the life insurance policy is a significant asset within the estate, assessing how its inclusion or exclusion affects overall tax exposure is important. For high-net-worth individuals whose estates exceed the federal exemption threshold, directing policy proceeds to a charity can reduce taxable assets and lower estate tax obligations. Additionally, placing the policy in an irrevocable life insurance trust (ILIT) can remove it from the taxable estate while still allowing for structured charitable giving. Proper documentation, including updated beneficiary designations and trust agreements, ensures the policy aligns with the estate’s overall distribution plan.