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If you bought life insurance earlier in life that you no longer need, the typical course of action is to let it expire or take the surrender value if necessary. There is another option: you can donate the insurance policy to charity. There are a number of conditions that would need to be met for this idea to work.
The charity must accept the insurance policy
The concept is that if you donate your insurance policy to a charity, they will ultimately receive the payout, which will be the donation. Since you are still alive, there will be a time delay before the payout takes effect. The ideal policies that charities want are ones that are about to expire or that will be paid out soon. In the meantime, premiums must be paid to keep the policy going. If you continue to pay as a donor, you can receive tax credits for the charity awards after the transfer is made, but if you stop paying, the charity will not receive a payout. The charity will usually want to pay the rewards, but they will only do so if the payout is worthwhile. The charity must also be willing to accept this type of gift as it may be too complicated or overwhelming for certain organizations. Large one-off donations can be problematic for the charity’s cash flow management.
The value of the insurance policy must be verified
The value of the policy must be assessed based on its terms. This includes the premiums, health conditions, drivers and special rules that may be included in the policy. This valuation would need to be done by an insurance broker or actuary.
Your income must be high enough
If you manage to donate the insurance policy, you can claim up to 75% of your income in the year you donate the insurance policy. You also have up to 5 years to carry the amount forward if you cannot claim it immediately. If your income isn’t high enough or you can’t use the credits, there’s no benefit in making a large donation. Even if all ducks compete, you’ll receive a fraction of the donation in tax credit form – typically between 15% and 29% of the amount donated.
The insurance policy must be paid
The insurance payout must be intact to donate to a charity. If it doesn’t, the value won’t be as valuable.
Tax liability on sale
If the cash redemption value is greater than the adjusted historical cost basis (ACB) of the sale, there may be a tax liability on the sale that would negate any benefit of donating the insurance policy.
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