The amount of income-tax deduction available with a gift of life insurance depends on the valuation of the policy. Premiums are generally tax-deductible to the donor, provided the charity owns the policy. If an existing policy is given to the charity, the contract's value is tax-deductible. Basically, the amount of the deduction is dependent on the replacement cost of the policy (that is, the single premium cost of purchasing the policy).

Gifts of life insurance contracts with gains that have been borrowed against will create income tax consequences for the donor. If the donated life insurance policy has an outstanding policy loan, the donor is considered to have received consideration in amount equal to the loan. A donor who contributes a policy with a loan has entered into a bargain sale. Under the bargain-sale rules, a donor who assigns an existing life insurance policy to a charity may take an income tax charitable deduction for the lesser of the cash value of the policy at the time of gift or the donor's cost basis. In the case of a paid-up policy, it is the lesser of the replacement cost of the policy at the time of the gift or the donor's cost basis.

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