What can I do with a life insurance policy that I no longer need?
If you’ve had a life insurance policy earlier in life that you no longer need, the typical method of handling it is to let it lapse or take the cash surrender value if applicable. There is another option that may be available: you can donate the insurance policy to charity. There are a number of conditions that would have to be aligned for this idea to work.
The charity has to accept the insurance policy
The concept is that if you donate your insurance policy to a charity, they will eventually get the payment that will be the donation. Since you are still alive, there will be a time delay before the payment comes to fruition. The ideal policies that charities would like are those that are about to expire or pay off soon. In the meantime, premiums must be paid to keep the policy going. If you, the donor, keep paying, you can get charity tax credits for premiums after the rollover, but if you stop paying, the charity doesn’t get paid. The charity will usually want to pay the premiums, but will only do so if the reward is worth it. The charity must also be willing to accept this type of gift, as it can be too complicated or overwhelming for certain organizations. Having large one-time donations can be problematic for charity cash flow management.
The value of the insurance policy has to be verified
The value of the policy has to be valued based on its terms and conditions. This would include premiums, health conditions, riders, and special rules that may exist in the policy. This valuation would have to be performed by an insurance underwriter or an actuary.
Your income has to be high enough
If you 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 roll over the amount if you can’t claim it right away. If your income isn’t high enough or you can’t use the credits, there will be no benefit to making a large donation. Even if all the ducks line up, you receive a fraction of the donation in terms of the tax credit, generally between 15% and 29% of the amount donated.
The insurance policy must be paid
The insurance payment must be intact in order to donate it to a charity. If not, the value will not be as valuable.
Tax liability on sale
If the cash salvage value is greater than the adjusted cost basis (ACB) of the sale, there may be a tax liability on the sale that would negate any advantage of donating the insurance policy.