Using Life Insurance to Increase Donations to Charity

If you donate to a certain charity on a regular basis you may want to consider using life insurance to generate a substantially larger gift. Let me give you a quick example. If we had a 40 year old who donated $30/month to his favourite charity and we assume that he lives to the ripe old age of 100, he will have donated a total of $21,600 to this charity. Additionally, his out of pocket cost would be closer to $13,600 since he would be entitled to the charitable donation tax credit for his contributions.

If he had instead taken out a term-to-100 life insurance policy (this is the cheapest form of whole-life insurance you can get), a $30/month premium would provide almost $100,000 in death benefit to the beneficiary of his choice. Even better still, it is possible for the monthly premiums to be claimed as charitable donations if he assigns ownership of the policy to the charity and irrevocable designates the charity as the beneficiary of the policy. He would continue to pay the premiums, but now they would qualify for the charitable donation tax credit as well.

In this case the same out of pocket cost of $19/month (after factoring the tax credits) can generate either $21,600 in donations (assuming you live to 100) or $100,000 in donations whenever you die.

Advantages

1. You can donate a significantly higher sum to your charity of choice.
2. That same gift can be realized even if you die earlier than expected since the death benefit doesn’t depend on how long the policy has been in effect.

Disadvantages

1. You have to ensure that you can stick to this commitment for life. (The good news is that if you can no longer afford to pay the premiums the charity can potentially take over the payments temporarily or permanently if they choose to do so.)
2. The charity won’t be receiving any funds from you until you die.
3. The cost of the policy goes up (or the death benefit goes down) if you are less healthy than average.