April 24, 2025

Life Insurance: A Multi-Purpose Tool for Charitable Giving

Many people have a life insurance policy, but don't know the full extent of its capabilities.

When helping clients make their charitable giving plans, do not underestimate the role life insurance can play in supporting their charitable giving. As Michael Baer of Forward Wealth Management explains, “Life insurance is not just a single-use tool. It can do multiple things. One of the things it can do for people, other than protecting income and providing for a family, is help them support the charitable causes and organizations that are meaningful to them.”

Using life insurance to make charitable gifts

While your clients can make charitable gifts of life insurance in a variety of ways, here are a couple of simple options they can consider:

1. They can purchase a new policy and designate their selected nonprofits as beneficiaries. Clients that are younger and relatively healthy may be able to purchase a large life insurance policy for a relatively low annual premium. Designating their selected nonprofits as the policy’s beneficiaries allows them to leverage this small annual investment into a larger eventual gift.

2. They can donate an existing policy to an organization of their choice. Clients who own paid-up life insurance policies (policies that no longer require premium payments) could donate those policies to a specific nonprofit of their choosing. Depending on the donor’s tax situation, they could receive a charitable deduction when they transfer the policy that is equal to either the policy’s fair market value or their adjusted cost basis in the policy (which is usually equal to the total premiums paid).

Clients owning policies that are not paid-up could ask the organizations they would like to support whether they would be willing to take ownership of the policy, as long as the donor makes annual payments to the organization to cover the premiums. (NOTE: Some organizations will not accept donations of policies that are not paid up at the time of transfer.)

Using life insurance to facilitate other gifts

Instead of giving a life insurance policy or proceeds directly to an organization your client wants to support, your client could use life insurance to facilitate charitable gifts of other assets.

Nonprofit organizations typically do not pay income tax on the donations they receive. However, individuals are required to pay income tax on certain types of inherited assets. For example, people typically would have to include funds received from an inherited traditional IRA or qualified retirement plan in their taxable income.

Life insurance proceeds are usually excluded from a beneficiary’s taxable income. Therefore, if your client can purchase sufficient life insurance to provide for their loved ones, designating them as beneficiaries of that policy may be more tax-effective than leaving other assets – like retirement plan funds – to them. Your client could then use those other assets for charitable giving.

Helping your client decide whether to fund their charitable giving with insurance

When helping clients determine what role life insurance should play in their charitable giving, Baer recommends that you start by asking your clients a few basic questions:

• Do you wish you could give more to charity?
• Do you have existing life insurance policies?
• What need did you originally purchase the life insurance to address, and has that need changed over time?
• Do you have sufficient assets outside of life insurance to provide for your loved ones and meet your other financial and estate planning goals?

Guage your client's interest in using their life insurance policy.

“Sometimes you’ll find out that a client does not need or want a life insurance policy anymore,” Baer notes. “For those people, using life insurance for charitable giving may be a great solution. For others who need their life insurance to provide for a spouse, children or other loved ones, it may not yet be the right fit.”

He also encourages advisors who are new to charitable planning with life insurance to work with others who have more experience. “If you’re not an expert with respect to a certain type of asset, don’t be afraid to seek out the advice of those who are.”

Need additional assistance?

If you or your clients have additional questions about making gifts to MCF, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.