Am I able to designate a charity as my life insurance beneficiary?
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Asked March 5, 2012
The beneficiary of a life insurance policy is up to the owner of the policy. If you take out a policy and want to donate the final payout to the charity of your choice, it is your right to do so. How the charity receives the payout will have an effect on your estate taxes, though, so use care when doing so.
The owner of a life insurance policy has the option of choosing the beneficiaries, but you are not limited to naming a single beneficiary. For example, you could leave a portion of the policy to pay your final expenses, another portion to your children or grandchildren, and the remaining portion to the charity of your choice. In this circumstance, the executor of your estate would handle portioning out the life insurance payout.
If the policy is purchased on behalf of the charity, with you as the owner, it affects your taxes differently than if you simply name the charity as a beneficiary. In the former case, you can claim the initial purchase cost and future premiums as a tax exemption. Conversely, if you own the policy and the charity simply collects the final payout, your estate will be taxed for the amount of the policy before the payout is made. In the latter situation, your estate will be allowed to claim exemptions on the payout amount, offsetting your final estate taxes.
The primary advantage of owning the policy yourself is that you will retain the ability to borrow against the cash value of the policy. If the charity is the named owner of the policy, you forfeit the financial tool aspects of the policy, but the named charity would inherit them. Both methods have advantages and disadvantages, and deciding on the method which works best for you deserves careful consideration before signing over the policy.
Answered March 5, 2012 by Anonymous