I approach life insurance as a way to protect a financial need. It is there to protect against the catastrophic loss of your life that would forever change the financial future of your family. Life insurance can maintain your family's lifestyle, provide resources for your children's college education, protect the transition of your business, etc.
The older you become, the less dependent your family may become on those policies in place. Your spouse may have his or her own earning potential and the children have graduated from college. If you still have that policy and it is not protecting a financial need, you may consider changing the beneficiary to your favorite charity.
The Tax Cuts and Jobs Act of 2018 significantly increased the standard deduction amount, resulting in far fewer taxpayers itemizing. Without the itemized deduction, charities and non-profits saw far less giving, stretching their organizations thin.
By changing the beneficiary on an existing life insurance policy, there is no cost to you. You are already paying the premium, and the charity stands to receive the death benefit-substantially more than if you donated out of pocket. If you still want your heirs to receive a benefit, you can also specify that the charity receives a certain percentage or specific dollar amount of the death benefit.
If you have a life insurance policy with a cash value that is essentially paying the premium and there is a taxable gain, you can gift that policy to a charity. The charity would then surrender the policy and receive the cash value. The charity would not have to pay tax on the windfall, and you would avoid tax on the payout.
You can do this because the insurable interest was established at the creation of the policy. As the owner of the policy, you have the right to change the beneficiary as you wish. For example, if you were to divorce, you may not want the payout of your life policy going to your ex. You're allowed to change that beneficiary. Depending on your situation, a charity may be a good alternative.
There may be tax benefits for you too. Depending on how you structure the gift, you may be able to take an income tax deduction equal to the fair market value, and you may be able to deduct premiums paid annually on your tax return.
Another way to use life insurance to benefit a charity is to allow the charity to be both the owner and the beneficiary of the policy. The way this works is the charity would purchase a life policy on your life. You would make annual tax-deductible gifts to the charity who would then pay the premium to the insurance company. Upon your death, the charity would receive the death benefit, which is usually greater than (or equal to) the premiums paid.
These are just a few ways to reposition a life insurance policy to benefit a charity. Discuss your desire for charitable giving with a trusted insurance agent. Your tax consultant and financial adviser can also provide insight as to what would be most beneficial to both the charity and your heirs.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University's Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Saturdays at 10 a.m. on AM 920 The Answer. Lako is a Certified Financial Planner professional.