How to Donate Your Life Insurance Policy to Charity

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published 25 June 2024

When you originally invested in your life insurance policy, you were likely thinking about taking care of others after your lifetime. But you may now find that you and your family no longer need that extra layer of financial protection. You may have even asked yourself, “Should I surrender or cancel my policy?”

If you’re philanthropically inclined, you can contribute your life insurance to a 501(c)(3) public charity, like a donor-advised fund. By contributing your policy during your lifetime, you’re able to use the value of your policy to benefit your favorite causes, while also claiming a current-year income tax deduction (if you itemize) and potentially reducing your estate tax liability. You can also name a charity now to be a beneficiary of your policy after your lifetime, helping to extend your charitable legacy.

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1. Transfer the policy ownership and beneficiary interest to your favorite charity, which is generally possible with permanent life insurance. After taking ownership, the charity may opt to surrender the policy for its cash value. (Life insurance companies often allow a policy owner to “surrender” their policy — in other words, cancel it to receive a cash value, minus any surrender charges and fees.)

Life insurance is considered an ordinary income asset, meaning that surrendering a policy for its cash value would trigger ordinary income taxes for you on the policy’s appreciation — even if you took that money and then donated it to charity. But, by contributing your policy directly to charity, you potentially avoid the tax you would otherwise incur if you surrendered the policy yourself and donated the proceeds. And because U.S. public charities are tax-exempt, the charity can surrender the policy for its full, untaxed value, maximizing the impact of the contribution.
Assuming you itemize your deductions, you may also claim a current-year tax deduction for the policy contribution. Because life insurance is an ordinary income asset, the deduction is limited to the lesser of the policy's value or your adjusted cost basis in the policy (generally, premiums paid to date).
An added benefit is that the policy’s value could potentially be removed from your gross estate, lowering your estate’s eventual tax burden.

2. Retain ownership of your policy but name a charity as a full or partial beneficiary. In this situation, the charity would receive a designated payout from the insurance company after your lifetime. While you can’t claim a charitable income tax deduction during your lifetime in this situation, your estate will be entitled to claim a charitable estate tax deduction for the beneficiary proceeds distributed to charity at your death.

Option 1: Surrender the policy herself and then contribute the post-surrender proceeds. Shannon’s policy has a $500,000 surrender cash value, with $200,000 in basis (premiums Shannon has paid over the years), without a loan against it. Because life insurance is an ordinary income asset, if Shannon surrendered the policy herself and then contributed the proceeds, she’d incur income tax on $300,000 (the policy gains). Assuming a 24% income tax rate, the post-surrender charitable contribution would be reduced from $500,000 to $428,000. (For simplicity, this hypothetical example assumes no surrender charge or other fees.)

Option 2: Contribute the policy directly to charity, which then surrenders the policy for its cash value. If Shannon transferred the policy ownership to her desired charity and let the charity handle the surrender (rather than Shannon surrendering the policy herself), she would eliminate the taxable income. And, as a tax-exempt entity, the charity would not pay income tax when surrendering the policy. Unlike the first option, the charity would receive the full $500,000 value. (Again, for simplicity, this hypothetical example assumes no surrender charge or other fees.)

It can take time to finalize the policy ownership transfer through your policy administrator (insurance company), which could result in a delay in making the gift. If you’re planning to make your contribution near year-end, consider starting the process early to avoid any deadlines for yearly tax deduction eligibility. Please note that most charities want to know if you are planning to donate a life insurance policy, whether during or at the end of your lifetime. Some due diligence review before acceptance may be required by the recipient charity.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Caleb is Director of the Charitable Strategies Group at Schwab Charitable. He oversees the specialized team that conducts due diligence review of complex non-cash assets and educates advisors and donors on tax and legal issues associated with such assets. Caleb brings over a decade of nonprofit management and gift planning experience, which includes serving as a planned giving director for several universities.