Charitable Giving Riders are a way for you to donate some of your total death benefit from your life insurance policy to a charity of your choice.
It is a newer type of rider available on modern life insurance plans.
You can, for example, attach this feature to a policy with a face value over $1,000,000 and then pay 1% or 2% of your policy face value to a qualified charity that you choose.
In many cases, life insurance companies put a limit on the maximum gift amount you can provide to charity.
Who Is Eligible For The Charitable Giving Rider?
Anyone who takes out a permanent life insurance policy can use this rider if the life insurance company offers it. Life insurance companies typically have requirements, such as a minimum face value, or a maximum donation amount.
The amount of coverage you need, whether you have to use this benefit when you first get a policy, and what flexibility you have for the charities in question is going to vary from one company to the next so check with each before you sign up.
Once you add this rider to your life insurance policy you do not have to take any additional action. There are a few limitations the biggest one being the high amount of protection that you have to purchase in order to use them. Any charity that you choose to be the recipient of this feature has to be a qualified 501 c 3 charity.
They have to meet the IRS definition for being a nonprofit organization. You also have to make sure that the charity you choose will accept the life insurance policy payout. Some policies like term policies are not often accepted by nonprofit organizations.
Who Is It Best for?
This is a good option for those who do not want to give all of their death benefit, only some of it to a charity. There are alternatives that you can use with your policy if the limits that your life insurance company places on the rider are insufficient.
You also have the option of a policy donation. This is a strategy that becomes a bit more complex compared to purchasing the charitable gift rider. In this case the policy donation gives a much larger benefit to your charity.
You can provide the entire life insurance policy you have to a charitable organization in order to reduce your taxable estate. If you are an upper income taxpayer this can save you thousands of dollars in your estate taxes.
Giving away your policy as a gift will also yield you a current income tax deduction for the fair market value of your policy which in certain cases can be very significant. Obviously in this case the charity receives the entire face value of your policy when you pass away as opposed to a small percentage.
This will typically be much more than they would receive from a rider. The cost to you as the donor is the premium you pay on the policy and any premiums that you have to pay after the date of the gift.
How Does The Charitable Giving Rider Work?
There is no ceiling for estate tax purposes which means there is no limit on the size of the policy that you can take out and donate to a charity.
This will not interfere with any current investment strategy you are using with the policy but it does help you to dispose of the unwanted policy when you no longer have any need for it.
For example, if you are facing highest state taxes, you can take out a policy between now and the time of your passing and use it for the cash value it provides in the immediate future and when you pass away donate the face value of the policy to a charity so that your beneficiaries do not have to deal with high estate taxes.
Gifting your policy has better income tax advantages however you can also opt to name the charity that you choose as your beneficiary so that when you pass away they receive the death benefit.
Naming a charity as the beneficiary for your life insurance policy also guarantees privacy if you want to keep your gift secret from your families.
Such a contract cannot be contested so no one can stop the donation from taking place once you pass away.
Pros and Cons
The main drawback associated with this rider is the fact that many life insurance companies will place a limit on the amount you can donate.
This limit is often very low and typically correlates to the amount of death benefit you have. The higher the death benefit you have for your policy, the more you can donate but you will still be limited to just a small percentage of your total death benefit.
This might not be the best option for you if you are trying to make a charitable donation for tax purposes, especially estate taxes.
If you only want to give a small part of what you have to charity. If you want to donate to multiple charities you may not have that option with this rider. Most insurance companies only allow you to donate to 1 choice.
Of course, the biggest benefit is you can donate just a small percentage of your total policy to the charity of your choice without taking away from the benefits you leave behind your beneficiaries.
How Much Does It Cost?
These features do not come at an additional cost in almost all cases.
They do not reduce your cash value for your whole life insurance policy nor will they take away from the death benefit.
Essentially they eliminate the need to create a separate gift trust or pay for the administration of a separate gift Trust until you pass away.