Maximizing your gift to charity

Charitable Life Insurance Gifts

Although a lot of people would like to donate more to their favorite charity, most feel financially unable to make a significant difference.  The gift of life insurance can be an effective and affordable way to make a much larger donation.

The following outlines three strategies that involve charities and life insurance:

Strategy 1

The “pay as you go option” involves an individual applying for a new policy and naming the charity as the owner and beneficiary. Any premiums will then be considered a donation and as such you will receive a tax receipt.  When the individual whose life is insured passes away the charity will receive the proceeds from the policy.  If an individual is unsure whether they will be able to keep the policy in force (paying the premiums every year) then this strategy is recommended.  If the individual ceases to pay the premiums then they will at least have obtained the benefit of the tax receipts for those premiums paid.  There are policies (i.e. Universal Life) which offer flexible premium payments that can be used for this strategy.

Illustration:  Mrs. Smith has decided that the best way she can make a significant contribution to her favourite charity is through life insurance.  Mrs. Smith is in good health and was approved for $300,000 in coverage through a universal life insurance policy.  Premium payments paid by Mrs. Smith will be eligible for a donation receipt in the year in which she makes the payments.  If Mrs. Smith continues to pay the premiums, then the charity will receive the death benefit upon her passing.

Strategy 2

An individual can donate an existing policy to charity.  Any future premiums the individual pays will be considered a donation and as such they will receive a tax receipt.  As the individual transferred the benefits to the charity, they will be deemed to have disposed of the policy, therefore any policy gain will be taxed to the individual as income.  The cash surrender value minus loans plus any accumulated dividends and interest will result in a donation for which the individual will receive a tax receipt.  With this strategy it is really important to look at the individual’s personal circumstances.

Illustration:  Mr. Brooks took out a whole life insurance policy for $200,000 when he was 30 years old.  The annual required premiums were $3,651. Today the policy has a total cash surrender value of $174,853 and a total death benefit of $632,929.  Mr. Brooks no longer has a need for life insurance and desires to make a significant contribution to a charity.  Mr. Brooks has decided to donate the life insurance policy to his favourite charity.  This has resulted in a policy gain of $174,853 equal to the cash value.  In addition, Mr. Brooks will receive a donation slip for $174,853.  An important point to consider is that the donation credits do not have to be claimed in the year of the contribution, they may be carried forward.  Mr. Brooks may continue to pay future premiums on the policy resulting in additional donation receipts equal to the annual premium amounts.  Another option may result in the policy funding itself in which case Mr. Brooks would no longer have to pay future premiums.

Strategy 3

Individuals can be the owner of a policy and designate a charity as the beneficiary of a new or existing policy.  This may seem similar to Strategy 1 but the main difference is that in Strategy 3 the charity is the beneficiary but is not the owner.  In addition the beneficiary is revocable (rather than irrevocable).  The individual may intend for the charity to receive the life insurance proceeds upon their death but has the right to change beneficiaries.  The fact that the policy beneficiary is revocable means the individual does not receive a donation tax receipt for the annual premium costs. This would not generate any tax credits for the individual during their lifetime.  Assuming that the charity is named the beneficiary at the time of death then the benefit will be paid directly to the charity.  In the year of death, the individual will receive a charitable receipt for the face amount of the insurance proceeds that the charity receives.  The tax benefit is the same as a bequest which can be claimed on the final two tax returns but passes outside the estate for probate purposes and preserves privacy.  This method is often an alternative to a bequest.

Illustration:  Mr. Johnson has an insurance policy and has named his estate the beneficiary.  In Mr. Johnson’s will he has indicated a charitable bequest to a couple different charities.  We noted that if the life insurance proceeds are paid into the estate then various administration and probate fees may apply.  We suggested that Mr. Johnson update his will by excluding the charities and changing the beneficiaries on his life insurance contract to be the charity of his choice.  If the death benefit amount is greater than what he was planning to donate then the solution is simple.  Mr. Johnson can name his estate the beneficiary of a portion (i.e. 50 per cent) and also name the charities for the remainder (i.e. 50 per cent).  Another benefit is that it is relatively easy to change the beneficiaries on a life insurance contract if circumstances should change.

Using life insurance to assist charities is in many ways a practical and affordable way to make a sizeable donation.  The use of insurance in some strategies may greatly increase your options for your planned gift.  Each of the above strategies has different levels of flexibility and tax benefits.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors (insurance consultant, financial advisor, accountant, and estate lawyer).