What Can I Do With a Life Insurance Policy That I No Longer Need?

If you had a life insurance policy early in life that you no longer need, the usual way to handle it is to let it expire or take the cash back value if it applies. Another option may be available: you can donate the insurance policy to charity. There are a number of conditions that must line up 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 eventually get the amount that will be the donation. Since you are still alive, there will be a time delay before the payment will pay off. The ideal policies that charities might want are those that are about to expire or pay off soon. In the meantime, premiums must be paid to keep the policy going. If the donor continues to pay, you can get charitable tax credits for insurance premiums after the transfer, but if you stop paying, the charity will not receive any payments. The charity will usually want to pay the premiums, but will only do so if the return is worth it. The charity must also be willing to accept this type of gift as it can be too complicated or confusing for some organizations. Getting large, one-time donations can be a problem for a charity’s cash flow management.

The value of the insurance policy must be verified

The value of the document must be evaluated based on its terms and conditions. This will include premiums, health conditions, passengers, and special rules that may be in the policy. This assessment must be done by an insurance underwriter or actuary.

Your income must be high enough

If you succeed in donating the insurance policy, you will be able to claim up to 75% of your income in the year you donate the insurance policy. You also have up to 5 years to carry forward the amount if you cannot claim it immediately. If your income is not high enough or you cannot use the credits, then there is no point in making a large donation. Even if all the ducks line up, you receive a small portion of the donation in terms of tax credit – usually between 15% and 29% of the amount donated.

The insurance policy must be paid

Insurance payments must be in order in order to be donated to a charity. If not, then the value will not be worthwhile.

tax liability for sale

If the cash back value is higher than the ACB of the sale, there may be a tax liability on the sale eliminating any benefit of donating the insurance policy.

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