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Can A Charity Be One Of My Life Insurance Beneficiaries?

Life Insurance

When you create a life insurance policy, you’ll need to decide who the money should go to. Many people love the idea of giving to charity through your life insurance but can you do it? There are a few misconceptions about who can be a beneficiary and how it all works. We’ll look to clear that up for you here.

What is a beneficiary?

The whole point of life insurance is to leave money behind after you’re gone. Who inherits that cash lump sum will be known as your beneficiaries. Once your insurance company pays out, they will receive the funds.

Making a charity my beneficiary

Many people think that the beneficiary of your life insurance policy has to be your closest family member. In reality, it can be anyone you wish. This can include multiple beneficiaries, including any charity. As with any beneficiary, you want to make your intentions very clear by giving their exact name and registered charity number.

If you choose, you can have as many beneficiaries as you want which can be discussed with your life insurance provider. You can specify percentages to be left behind such as 80% to your spouse and 20% to your chosen charity. However you try to do this will be up to you.

Leave charity in your will, not in your life insurance

If it’s left in trust, your life insurance policy is not going to form part of your estate. This means it doesn’t form a part of your inheritance tax calculations and the dedicated beneficiary will receive 100% of the funds.

Money in your estate is different and you may have to pay tax on it. There is an exception to this and that is if you’re giving money to charity. Any charitable donation will be deducted from your estate before any tax calculation is made.

As a simple example, let’s say you have a property worth £325,000 (which is the inheritance tax limit), cash worth £50,000 (therefore an estate worth £375,000) and life insurance valued at £100,000.

Giving £50,000 to a charity through your life insurance would mean that the whole of your estate (£375,000) would be liable to inheritance tax. In this situation, the 40% of the £50,000 above £325,000 would be paid in tax, which is £20,000.

Therefore:

Charity gets £50,000 Loved ones get £405,000 (£355,000 in the estate, £50,000 of life insurance) Taxman gets £20,000

Giving £50,000 to a charity through your estate is different. With this, all £100,000 of the life insurance is given to your loved ones. The £50,000 given to charity would be taken off the value of the estate and therefore they’d be no inheritance tax to pay.

Therefore:

Charity gets £50,000 Loved ones get £425,000 (£325,000 in the estate, £100,000 of life insurance) Taxman gets £0

This only makes sense if inheritance tax is potentially going to be an issue. If your estate is going to be well below the £325,000 threshold then it doesn’t really matter where the charitable donation is coming from.

Should charity be one of your life insurance beneficiaries?

As we’ve discussed, there is no issue with you naming a charity as a beneficiary on a life insurance policy. The more pertinent question in many cases is should charity be one of your life insurance beneficiaries? Tax isn’t the only factor.

One of the biggest benefits of a life insurance policy is that the money is going to be available almost instantly. This allows it to be used for clearing outstanding bills, paying funeral costs as well as clearing any inheritance tax.

Leaving to charity in your will allows your family to make all necessary payments and then give your charitable donation once probate has been granted. It makes it much easier for them to organize your finances in that way.

Name a charity as a beneficiary

If you’re wondering give whether you should give to charity in my life insurance policy then you have to do what’s right for you. Whatever steps you take, it makes sense to take the law into account and you can work around it. In some situations, that can mean giving money to a charity through your will rather than your life insurance.

While doing this can avoid paying a lot in taxes, in a lot of situations it won’t make a difference as there would be no tax to pay whichever way you did it. Ultimately, if you wanted to give money to charity through your life insurance then you can do that. You can have multiple beneficiaries and it’s a good idea to work with your insurer to make sure your wishes are met.

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