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Using life insurance for charity

Allen Wastler

Posted on December 11, 2023

Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Using life insurance for charity
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Detail how a life insurance policy can end up giving more to a charity than simple payments to a charity.

Note the ways a life insurance policy can be gifted to a charity.

Point out the possibility of donating a policy’s dividends to a charity over time.

Schools, hospitals, churches, support groups, clubs, foundations — these and many other worthy organizations rely in large part on charity to keep their operations funded. Usually, that means direct donations from those supporting their causes. But there is another method available to help them as well: Life insurance as a charitable gift.

“Life insurance is an excellent tool to provide financial security for the family. But life insurance can also be used to meet someone’s charitable objectives,” said Jacqueline Wiggins, an estate and business planning consultant at MassMutual. “Whether your charitable objectives involve $500 or $5 million, it is important to discuss them with your financial professional as part of your overall financial and estate plan.”

Here are some broad approaches illustrating how life insurance can benefit a charitable cause.

Charity as beneficiary

The most straightforward approach is to designate a charity as the beneficiary of a permanent policy, such as whole life. This type of policy, which covers someone for their entire life provided the premiums are paid, differs from term insurance, which covers someone for a defined period of time (after that set time term insurance policies usually have provisions for continuing coverage, albeit at higher premiums). When making a charity the beneficiary of a permanent policy, the donor retains ownership of the permanent policy and, therefore, has continued access to the policy’s cash value. (Related: Understanding cash value)

This strategy can be attractive because the donor can often make a larger gift — of the death benefit — than of smaller gifts of cash. For instance, a healthy adult may be able to purchase a life insurance policy costing a set number of premiums at $100-$200 a month with a $100,000 benefit. That benefit is far greater than what the person could donate at one time.

“I had a client and his wife, both of whom were University of Notre Dame alumni, buy a survivorship policy just for charitable purposes,” said John Ocwieja, a family business specialist with Hoopis Group in Chicago. “They bought it in their 40s and the premium was insignificant.”

There is added flexibility in that the charity can get the full benefit or simply share in part of the benefit with the family.

“Several members of our congregation designated the church as a beneficiary over the years, and it’s been an incredible blessing,” said Wiggins. “Where the charity is only a revocable beneficiary, the beneficiary designation can always be changed should the policyowner’s charitable goals or financial priorities change.” (Related: Whole life insurance’s role through life stages)

Gift of an existing policy

Of course, designating a charity as the beneficiary of a life insurance policy means it will take time before the organization receives any money. Those wishing to make an immediate contribution can consider making a gift of an existing policy.

For instance, a person may have a permanent life insurance policy that is no longer needed. Instead of surrendering the policy he or she can change the ownership and beneficiary to the charity. If future premiums are needed to continue the policy until the death benefit is received, the donor can make annual cash contributions to the charity. Alternatively, the charity can elect to place the policy on reduced paid up status; surrender the policy immediately; or take a loan against its cash value.1

Under this approach the donor could be eligible for a tax deduction for the current year, provided the cash gift is to a qualified charity. Such a deduction would depend on individual circumstances, so donors should consult a tax advisor before making such a move.

Purchase of a new policy

If no existing life insurance policy is available, the donor might consider buying a completely new policy and designating the charity as owner and beneficiary. Typically, this strategy involves a limited payment policy, where premiums are paid for a set period. The insurer can limit the amount of insurance based on the donor’s giving history or charitable obligations. (Related: Life insurance premium plans)

The donor can make annual cash contributions so that the organization can pay the premiums. As above, the donor will usually be entitled to an income tax deduction for any such contributions, subject to IRS limits. The charity can use the cash contributions or other funds to pay premiums on the policy.

Annual gifts through a life insurance policy

Some people would rather support causes on an ongoing basis during their lifetime. Here, too, insurance can make a contribution. Many whole life insurance policies, for example, receive annual dividends from the issuing company. Dividends vary in amount and are never guaranteed. Nevertheless, some companies have paid dividends on a fairly regular basis. (MassMutual, for instance, has paid annual dividends for over 150 years.)

A policyowner may choose to receive any dividends that his or her whole life policy earns in cash, and then donate them in cash to the charity or charities he or she chooses each year. Dividends can be used this way regardless of whether or not the policyowner decides to make the charity a beneficiary of his or her policy. (Related: Understanding life insurance dividends)

Dividends taken in cash will not be taxable to the policyowner until they exceed cost basis (the amount paid into the policy in premiums). The policyowner will usually receive a tax deduction for the contribution, subject to IRS limits.

Policy dividends can help make recurring donations without affecting a family’s budget. However, people should not rely on dividends alone to fund annual pledges or other recurring charitable commitments because, as noted earlier, policy dividends are not guaranteed and may not always be consistent from year to year. (Related: Donating to your old college)

Final wishes

Sometimes insurance can affect charitable giving indirectly. For instance, some people feel they are able to be more generous in their annual charitable donations knowing a life insurance policy is in place to help cover their family’s needs in the event they pass away.

“I also often see cases where a spouse or parent dies and a charity is not the beneficiary, but the beneficiary is aware of how important that charity — church, fine arts, college — was to the decedent,” said Wiggins. “In many cases, often a percentage of the death proceeds will be given by the family to the organization in memory of that person.” (Related: What your loved ones should know)

Within these broad approaches, specific strategies for using insurance for charitable giving will depend on individual circumstances and finances. Many donors find it advisable to consult a financial professional and tax advisor to explore options before giving to a charity. And individual charities themselves may have different preferences and priorities for how they want to receive and use donations. Experts suggest consulting them as well when drawing up a plan.

Charities appreciate financial support. For donors, life insurance is one possible means for providing that support to help charities in their mission.

Discover more from MassMutual…

Estate planning for high-net-worth households

Keeping your heirs from fighting

Ultimate life insurance guide

This article was originally published in November 2016. It has been updated.


Such loans increase the chance a policy will lapse, reduce the ultimate death benefit, and could result in a tax liability if the insured dies before the loan is repaid.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.