Dollars & Sense - Donating a Life Insurance Policy

Donating an old life insurance policy to your favorite charity can be a win win proposition. In general, the full transfer of an existing life insurance policy to a qualified charity entitles its donor to a charitable income tax deduction. The amount of the deduction will be the lower of (i) the fair market value of the policy or (ii) the aggregate premiums paid into the policy by the donor. The fair market value or cash value would be reduced by any loans that are outstanding. In cases where the cash value is actually larger than the total premiums paid for the policy, the deductible contribution would be limited to the aggregate premiums. It’s important when gifting life insurance policies to a charity that you give up all incidents of ownership in the policy. Any continuing rights in the policy are likely to be treated as a so-called “partial interest” resulting in the loss of both income tax and gift tax deductions. This means, for example, you can’t donate the cash value and still retain the right to name the beneficiary. If you plan on continuing to make the premium payments on a donated life insurance policy you should donate the money directly to the charity and let them make the premium payments. If you send a premium directly to the insurance company you won’t get a charitable deduction for that premium. Donating a fully paid up policy that has long outlived its usefulness to you, can be an easy way to be benevolent without noticeably decreasing your resources. The charity can either cash it out or keep it and collect its face value when you die.

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