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Donations through a life insurance policy

Did you know that a charitable organization can be named the beneficiary of an insurance policy during your lifetime or upon your death? This is a simple and flexible way to make a substantial donation to a worthy cause, with a fairly modest investment.

The terms you choose for the donation through a life insurance policy will depend on your financial and philanthropic objectives, age and marital status. If you are donating to get a tax deduction, be sure to name the charity as both the beneficiary and the owner of the policy. If you name it as one or the other, you will not be able to deduct the donation proceeds from your taxes. The rule of thumb is if you donate a term life insurance policy, you can deduct the premium from your taxes, where as if you donate a whole life insurance policy, you can deduct the cost of the premiums and the cash value from your taxes.

  • If you assign an existing insurance policy to the MHIF, the Foundation becomes the policy’s owner and beneficiary. A tax receipt for the policy’s cash surrender value is issued during the tax year it was assigned.  Tax receipts will then be issued annually for the value of any premiums you pay over the course of the year.
  • When you purchase a policy, you can name the Foundation as the owner and beneficiary. In that case, it is best to spread the premiums over a limited period of 1 to 5 years.

A donation through an insurance policy generates significant tax savings for the donor. Because the donation is made in one’s lifetime, the estate receives no tax benefit.

However, if you believe that your estate is likely be taxed heavily, you may wish to defer your tax savings by designating the MHI Foundation as your policy’s beneficiary, in part or in whole, while you remain the owner. The donation will take place only upon your death, thereby generating tax savings for the estate.

Mr. O’Malley, a 35-year-old non-smoker, would like to donate a sizable amount to an organization that helped his parents. He takes out a new life insurance policy and names the MHI Foundation as both the policy owner and beneficiary. Upon his death, the Foundation will receive $50,000. The actual cost of the donation, after tax savings, will be $3,000.

Donation to the Foundation (policy’s death benefit) $50,000
Annual cost of premiums (5-year contract) $1,200
Tax credits (50% of the premiums paid) $600
Annual cost of premiums after taxes ($1,200 less $600)    $600
Total cost of the donation after taxes ($600 × 5 years) $3,000