Did you know you can donate a life insurance policy to charity?

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 the Biblioteca Pública. By contributing your policy during your lifetime, you’re able to use the value of your policy to benefit your favorite cause, 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.

Different ways you can donate life insurance:

There are two primary methods to contribute life insurance to charity, and each one has different timing and tax benefits.

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.)

Tax benefits to this method:

• 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. But by contributing your policy directly to the Biblioteca, you potentially avoid the tax you would otherwise incur if you surrendered the policy yourself and donated the proceeds. And because 501(c)(3) 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 your will. In this situation, the charity would receive a designated payout from the insurance company after your lifetime. While you wouldn’t be able to claim a charitable income tax deduction during your lifetime, your estate would be entitled to claim a charitable estate tax deduction for the beneficiary proceeds distributed to charity at your death.

This method can offer you more flexibility in case your circumstances change (you can change the beneficiary named on your policy), and it can be appealing to those who might not otherwise be able to make a significant gift during their lifetimes. Keep in mind that you may need to continue paying policy premiums for the remainder of your life.