Why life insurance matters to charitable giving

Even in an era when term life insurance policies may appear to dominate, many people still hold whole life, variable life, or universal life insurance policies. In many cases, when the original need for a policy goes away (e.g., children become independent or other assets have increased to fill risk gaps), a policyholder may be left wondering what to do with the policy. 

Before cashing in a policy, it’s worth knowing that life insurance can play a meaningful and often overlooked role in charitable giving. A common approach is naming a charity as the beneficiary of a life insurance policy, either in full or in part. This strategy enables a donor to make a significant future gift at a relatively modest current cost of the annual premiums, particularly when the policy is already in force. For someone who has established a donor-advised or other type of fund at the Community Foundation of the Endless Mountains, this method may align well with estate planning goals because the death benefit passes directly to the fund outside of probate and may help reduce the taxable value of the estate.

Another way insurance policies are used in philanthropy is through the donation of an existing policy to the Community Foundation. In this case, actual ownership of the policy is transferred to the Community Foundation, which then becomes both the owner and beneficiary. The donor may be eligible for an income tax deduction equal to the policy’s fair market value, generally based on its “interpolated terminal reserve” plus unearned premium, subject to applicable limitations. If the policy still requires premium payments, donors can continue funding those payments through additional tax-deductible contributions to the community foundation or other charity, effectively converting future premium dollars into charitable gifts.

Finally, donors can use insurance creatively in more advanced charitable planning strategies. For example, a donor may purchase a new policy specifically for charitable purposes, often using annual contributions to fund premiums over time, or combine insurance with vehicles such as charitable trusts or donor-advised funds to enhance long-term giving impact. In some cases, insurance helps replace wealth passed to charity so heirs are not financially disadvantaged, allowing donors to balance philanthropic intent with family goals. Through these approaches, insurance policies offer flexibility, leverage, and tax efficiency, making them a valuable tool in a well-rounded charitable giving plan.

When incorporated into a comprehensive plan, life insurance can help create meaningful impact today and for future generations. If you have questions or would like to discuss how this strategy might fit into your charitable giving or legacy goals, we welcome the opportunity to connect. Please contact Jill Swingle, Director of Operations at [email protected]