Naming a Charity as a Life Insurance Beneficiary
Learn how structuring a life insurance gift to a charity impacts your estate, control over the policy, and potential tax advantages.
Naming a charity as a life insurance beneficiary is a method of philanthropic giving that integrates with an individual’s estate planning. This approach allows a policyholder to designate a non-profit organization to receive the policy’s death benefit upon their passing. It is a way to make a substantial future gift, transforming a personal financial product into a tool for a charitable legacy.
Methods of Designating a Charity as a Beneficiary
A policyholder can structure a charitable gift in several ways, depending on their philanthropic goals and family obligations. The most direct method is to name the organization as the sole beneficiary. In this scenario, the charity receives 100% of the life insurance proceeds, making it a straightforward donation.
Another approach is to name a charity as a partial, or pro-rata, beneficiary. This allows the policyholder to divide the death benefit by percentage among multiple parties. An individual could, for instance, allocate 70% of the policy proceeds to their children and the remaining 30% to a favorite cultural institution. This balances the desire to provide for family with the goal of supporting a charitable cause.
A charity can also be named as a contingent beneficiary. This designation means the organization will only receive the death benefit if the primary beneficiary is unable to accept it because they have passed away before the policyholder. For example, a policyholder might name their spouse as the primary beneficiary and a national relief organization as the contingent beneficiary. If the spouse predeceases the policyholder, the proceeds are directed to the charity.
Tax Implications of Naming a Beneficiary
When a policyholder names a charity as a beneficiary but retains ownership of the policy, this action does not create an immediate income tax deduction. Because the policyholder keeps control over the policy and can change the beneficiary, the gift is not considered complete for tax purposes. Premium payments are not tax-deductible charitable contributions.
The primary tax advantage relates to estate tax planning. Upon the policyholder’s death, the life insurance proceeds are included in their gross estate, but a corresponding charitable deduction is permitted for the amount paid to the qualified charitable organization. This deduction cancels out the inclusion of the funds, meaning the death benefit passes to the charity without being subject to federal estate taxes. For individuals with estates large enough to be subject to federal estate tax, this can reduce their overall taxable estate.
Transferring Policy Ownership to a Charity
An alternative strategy involves the complete transfer of a life insurance policy to a charity. This is an irrevocable action where the policyholder makes an absolute assignment of the policy, relinquishing all rights and control. The charity becomes the new owner and beneficiary, and this method results in different tax outcomes.
The primary benefit of transferring ownership is the potential for an immediate income tax deduction. The donor may claim a charitable deduction in the year the gift is made, valued at the lesser of the policy’s fair market value or its cost basis. This can be advantageous for a donor in a high-income year, as it can help offset tax liability.
If the life insurance policy is not fully paid up at the time of transfer, premiums are still due. Should the original owner choose to continue funding these premiums, those payments can be treated as tax-deductible charitable contributions each year. The donor makes these payments as cash gifts directly to the charity, which then pays the premiums.
The Designation and Documentation Process
To name a charity as a beneficiary, the policyholder must follow specific procedures. The first step is to gather information about the chosen charitable organization. This includes the charity’s full legal name, its official mailing address, and its Taxpayer Identification Number (TIN).
With the necessary information, the policyholder must obtain a “Beneficiary Designation” form from their life insurance company. These forms are available from the insurer, often through an online portal or by request from an agent. The policyholder will need to fill out the form, clearly specifying the charity’s information and the percentage of the proceeds it is designated to receive.
The completed and signed form must be submitted to the life insurance company. The designation is not official until the insurance company receives and processes the form. It is advisable to request a confirmation from the insurer to verify the change has been recorded.