Note: This article first appeared at NerdWallet.com. Click here to read the original.
More than 95 percent of American households give to charity. Some do it in the form of time — volunteering on the weekends, for instance — while others do it by donating cash or other items of value. For people looking to maximize their charitable donations, whole life insurance policies offer yet another way to pay it forward.
According to the 2012 Bank of America Study of High Net Worth Philanthropy, 62 percent of people donate to charity because they want to give back to the community, and 32 percent cite tax advantages as their primary motivation. Using a whole life insurance policy for charitable giving allows policyholders to satisfy both of these desires while offering an alternative to simply cashing out a policy — for instance, because your children are now grown and wouldn’t need to be provided for in the event of your death.
There are different ways to help a charity using your life insurance policy.
Charity as beneficiary
You can name the charity as a beneficiary, allowing them to reap all or a portion of your death benefit when you die. Because you maintain ownership of the policy, you can change your mind at a later date, choosing a different beneficiary if your situation or preferences change. While this does allow an estate tax deduction, it doesn’t have many short-term benefits.
Transferring policy ownership to charity
Transferring ownership of the policy to your charity will deliver the best short-term tax benefits through an income tax deduction.
By donating your life insurance policy, you are generally able to deduct the fair market value of the policy from your income tax liability. This could equate to tens of thousands of dollars, depending on your policy specifics. But this isn’t the only income tax benefit of policy donation.