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Donating a life insurance policy to charity has long been a way for people to provide support to their favorite organizations.  Even those with small cash reserves can make gifts of significant value through the donation of a life policy. The life settlement industry has greatly increased the flexibility of these donations in ways that can benefit both the donor and the organization.
 
There are two traditional methods of benefiting a charity through life insurance: a donor can name the charity as the policy’s beneficiary, or the donor can assign the ownership of the policy to the charity.  Naming the charity as beneficiary will only provide current tax benefits to the policy owner if it is an irrevocable designation.  Retention of just about any control over policy -- including power to change the beneficiary or to borrow against the policy – precludes a deduction by the donor.  Also, the charity obtains no immediate benefit by being designated as a beneficiary, and will only receive money from the policy following the death of the insured.
 
Assigning the policy to the charity is generally more tax-advantageous to the donor.  The amount of the deduction depends on the type of policy that is contributed.  Generally, the donor can deduct an amount roughly equal to the surrender value of the policy as well as any ongoing premium payments made by the donor.  The donor is not obligated to continue to pay premiums, however.

If the donor does not wish to continue making premium payments, the charity has three options.  The first option is for the charity to take on the responsibility of paying the policy premiums and eventually receive the full face value of the policy upon the death of the insured. While it is common for larger charities to do this, it is often not financially feasible for smaller organizations.  Also, the charity receives no immediate benefit from the gift, receiving funds only upon the death of the insured.  A second option is for the charity to convert (if possible) the policy into a paid-up policy of reduced face amount on which no further premiums are payable.  As with the first alternative, this provides no immediate benefit to the charity because it will not receive any benefit until the death of the insured.  A final alternative is for the charity to surrender the policy for its cash value.  While this does provide an immediate financial benefit to the company, it fails to maximize the full potential of the life policy gift.
 
Life settlements create a new option for charitable donations of life policies.  Life settlements have significant benefits that the other methods of donating life policies fail to offer.  By settling a donated life policy for cash, the charity will usually receive substantially more than the cash value of the policy.  This benefits not only the charity, but the donor as well.  Because the gift of a policy will have a much higher value if it is sold through a life settlement, the donor may be able to claim a much larger tax deduction from the donation. 
 
There are a number of other ways in which life settlements are advantageous for charities.  By settling the policy, the charity will be free of the responsibility of paying future premiums.  This can be especially important for smaller charities, which could risk having the policy lapse if a tight budget year led to difficulties keeping up with payments. 

Most importantly, the charity receives significant income that can be put to use right away for immediate needs.  This is also a final advantage for donors: life settlements provide a way for donors to witness the fruits of their life policy gifts while they are still alive.