Do you have permanent life insurance and normally give to charity? Are you in a position where you may not need the proceeds of a life insurance policy? If so you may consider donating your permanent life insurance to your favorite charity. There are basically two approaches that you may take in donating a life insurance policy to a charity. Both are affective and both have advantages and disadvantages.
In once scenario you may name the charity as the beneficiary of the policy and they will thereby get paid upon your death. In this case you would continue to pay the premiums and the charity would receive the death benefit. An advantage to this method is that you keep ownership of the policy and thereby may continue to name or rename beneficiaries as you see fit. A disadvantage is that you will not be able to realize a tax deduction for a gift to a charity until your estate files its taxes after your death. Another advantage of maintaining ownership of the policy is you may name multiple beneficiaries on the policy splitting the gift between more than one charity.
If you decide to go with the second option you will actually assign ownership of the policy to the charity and continue to pay the premiums. This option is permanent and you are not able to change your mind on the donation or who the beneficiary may be. Your cost of the policy or the cash value at the time of the donation could be considered your tax basis for deduction purposes. There are not that many charities that will accept ownership of a life insurance policy due to legal and administrative issues. The reason for this is that they would be responsible for the management of the policy. However, larger charities and even some universities are beginning to accept these gifts.
If you do donate a life insurance policy to a charity by transferring ownership one way to pay the premiums is to donate appreciated equities that have been held over a year to the charity. The charity will accept the donation giving you further tax incentives and the charity will sell the security and they will not be responsible for any capital gains taxes and neither will you. In fact you will receive a tax deduction equal to the full value of the gift at the time.
If you have a retirement account that is around the same value of a life insurance policy you will have some things to consider. In these instances it may make more sense to donate the taxable retirement account to the charity and leave the life insurance policy to your family. While the proceeds of the insurance is taxable to your estate the proceeds will be provided to your family tax free to them. Also had you left them the taxable retirement account they would be taxed on the withdrawals as ordinary income.
