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Donating life insurance to charity: What you need to know

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A life insurance contract can provide essential protection for your loved ones. However, it can also allow you to make a greater impact with your money, helping to support causes and organizations close to your heart. By donating life insurance to charity, you can make a difference for many others—and you might even save money on taxes.

Here's what you need to know if you want to direct a portion of your life insurance benefit to a charitable organization.

Benefits of using life insurance for charity

You can support a charity's mission while alive by donating your time and money, and you can continue giving after death, allowing others to benefit from your generosity long after you've passed. Whether you prefer to give during life or after death, there are several advantages.

Amplify your charitable giving

You could just donate cash to a charity in need—people do it every day. So, why use life insurance? A death benefit from a life insurance contract can provide significantly more money, enabling you to amplify your giving. For example, if you pay a few thousand dollars per year in premiums for a contract, the eventual payout could potentially be six figures, depending on the circumstances. Once you know your loved ones are taken care of, you can use the excess money to support charities that do important work in your immediate area and beyond.

Access potential tax benefits

In some cases, you qualify for a tax deduction when donating life insurance to charity. However, the amount of any deduction depends on several factors, and it's critical to work with a tax expert when designing a strategy.

For example, if you donate your contract to charity, any premiums you subsequently pay to keep coverage in force could be deductible. Or, if there's a substantial cash value, that asset might contribute to a tax deduction. Finally, there could be advantages of leaving a death benefit to charity. If you're concerned about estate taxes, keeping the payout out of your estate could help with those taxes as well as probate costs (if applicable).

To make the strategy work as intended, you and a financial advisor should review any cash value, cost basis, premium payments, loan balances and other considerations before making decisions. Additional strategies may be available, so reviewing everything with legal and tax professionals is crucial.

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Charitable Strategies: Charitable Life Insurance

How to donate a life insurance contract

You can give various types of life insurance contracts to charity, and you have several options for doing so. For instance, you might give to an individual charity, or you might add assets to a donor-advised fund that spreads the wealth among many recipients for years to come.

Permanent life insurance is often a popular choice because it's more likely the organization might eventually receive a death benefit. But you can also consider using term contracts or naming a charity as the beneficiary of your workplace coverage. Either way, it's possible to get a new contract that benefits charity or give an existing contract you no longer need.

Name specific beneficiaries

An easy way to help a charity is to name it as the beneficiary of a contract. That might make sense when you have existing coverage you no longer need. For example, if you bought insurance to protect your children against the early death of a parent, you may not need coverage anymore once your children are self-sufficient.

Changing the beneficiary is generally easy and involves submitting a request with your insurer. There's typically no immediate tax benefit from changing the beneficiary on a contract, but you can make an impact while keeping your options open. Plus, this might help prevent the assets from becoming part of your estate after death.

Keep in mind that this isn't all or nothing. For instance, you can make a charity a full or partial beneficiary, and you can spread the death benefit payment among multiple beneficiaries (like a mixture of family members and charities).

Transfer ownership

You can also transfer ownership of a contract to charity. This approach requires that you make the charity the contract owner, allowing the charity to name itself as the beneficiary. From there, you can continue paying premiums if the contract is not yet paid up. For even more tax benefits, it could make sense to give appreciated assets to the charity to fund premium payments. It's critical to work with a financial advisor at every decision point.

Donate dividends

If you have a contract that pays dividends, you can assign those dividend payments to the charity. Alternatively, you might forward any dividend payments you receive to your favorite cause. A benefit of this strategy is that you can keep your life insurance coverage, and you don't need to sell assets to fund the donations. Again, you could potentially qualify for a tax deduction based on the value of any payments that go to the charity.

Give the gift of life insurance

If giving gifts of life insurance appeals to you, it's important to understand some of the pitfalls and logistics. That way, you can fulfill your goal of helping a charity with fewer surprises or unexpected consequences.

You typically need to itemize deductions to be eligible for current-year income tax benefits. Not everyone itemizes, so ask your financial advisor whether it makes sense to do so. What's more, you typically need to permanently transfer all aspects of ownership and control to a tax-qualified charity to be eligible for a deduction. Otherwise, as the owner, you could potentially still have the right to change the beneficiary, surrender the contract or otherwise get financial benefits that reduce the amount going to charity.

It's also wise to clarify everything with the charity receiving your donation. For example, who should pay any additional premiums, and how can those premiums be paid? Do you need to send cash, or can you donate appreciated investments and other assets?

Helping others with gifts of life insurance

When you're fortunate enough to give back to others, using life insurance can help maximize your giving. Death benefits provide significant payouts—often much more than you might be able to give in cash. Plus, you might qualify for a tax deduction, helping you remain financially secure while donating assets to others.

To explore the possibilities, speak with a financial advisor. There may be multiple ways to practice generosity, and a professional with experience using these strategies can help you design one that fits.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance, may be solicited.