MAXIMIZE YOUR CHARITABLE IMPACT WITH LIFE INSURANCE

You have more power to make a difference than you realize. By gifting a life insurance policy to a charitable organization, you can make a stronger impact towards the causes you care most about. 

WAYS TO DONATE LIFE INSURANCE:

1. Gifting ownership of either an existing or new life insurance policy to a charitable foundation.
2. Retaining ownership and naming a charitable organization as the beneficiary of an existing life insurance policy.

The main differences between the two options include the control you retain, and the tax benefits you receive. 

GIFTING OWNERSHIP OF A LIFE INSURANCE POLICY

This ownership option is best if you require a donation receipt immediately. 

• You take out a new life insurance policy in the name of a charitable foundation or irrevocably transfer the ownership of an existing policy.
• You lose ownership of policy; the charity now owns the policy.
• You would receive the following tax incentives:
• For a new policy you would receive a chartable tax receipt for the cash value of the policy
• For an existing policy you would receive a chartable tax receipt for the fair value (FV) of the policy being gifted on the date of the ownership transfer
• In some instances, the fair value of the life insurance policy on the date of ownership transfer might be higher than the cash surrender value (CSV). The age and health of the lives insured are factors that can impact the policy valuation and donation receipt. An actuarial assessment is required to determine if a donation receipt more than the cash surrender value could be issued.
• If there are ongoing premiums to be paid on the policy the charity is responsible for those payments unless the donor decides to continue making the premium payments. In this circumstance the donor receives a donation receipt for any life insurance premiums they pay.
• At maturity, the life insurance policy proceeds are paid directly to the charity. No donation receipt is issued to the donor’s estate for the proceeds made at this time.

TAX PLANNING TIPS:

• If the policy has a fair value (FV) greater than the cash surrender value (CSV), the donation receipt will be issued for the FV.
• You as the donor will realize taxable income for the difference between the policy adjusted cost base (ACB) and the CSV. Your insurance company or professional advisor will be able to identify the CSV and ACB for the life insurance policy.
• The difference between the policy CSV and the FV is not considered taxable income resulting in a donation receipt more than your taxable income from the donation of the policy.
• This excess donation receipt can help offset other taxable income.

CASE STUDY

GIFTING OWNERSHIP OF A LIFE INSURANCE POLICY

Susan would like to donate her policy to an organization that supported her husband for many years while he was sick. Susan has owned a life insurance policy for 50 years and is currently 76 years old. Susan no longer requires the life insurance policy for estate planning purposes and wants to donate its ownership. 

Listed are the policy details as of the date of ownership transfer: 

• Face Value: $1,000,000
• Cash Surrender Value (CSV): $200,000 Fair Value (FV): $750,000
• Adjusted Cost Base (ACB): $100,000 Annual Premium: $2,500

Susan plans to continue making the $2,500 annual premium payments on the donated policy. Listed are the charitable tax receipts Susan will receive: 

• $750,000 the FV of the insurance on the date that ownership transfers
• Any future donations she makes to cover the annual premium payments.

Susan will realize $100,000 taxable income from the deemed disposition of the policy. (CSV value ($200,000) – ACB value ($100,000)).

Susan will have $650,000 of excess donation receipt above the taxable income from the policy disposition that she can use to offset other taxable income. 

NAMING A CHARITY AS BENEFICIARY OF A LIFE INSURANCE POLICY

This beneficiary option is best if you need a donation receipt in your estate, not immediately or during your lifetime.

• You name a charitable organization as a beneficiary of the policy.
• You retain ownership of the policy.
• You can divide the policy among several beneficiaries. This could include multiple charities and family members.
• You can change the named beneficiaries in the future if the beneficiary designations are recoverable.
• You continue to pay the policy premiums going forward and will not be issued a donations receipt for premium payments because you retain ownership.
• When the policy matures, any life insurance proceeds the charity receives, as a beneficiary of the policy, will generate a donation receipt for the policy owner.

TAX PLANNING TIPS:

• Your estate receives a charitable receipt to help offset taxes owing.
• The life insurance proceeds are paid directly to the named beneficiaries and do not fl ow through your Estate.
• Payments collected by beneficiaries more quickly.
• Not exposed to Estate creditors.
• Exempt from probate or estate administration fees.

SHOULD YOU CONSIDER CHARITABLE GIVING USING LIFE INSURANCE?

This strategy could be right for you if the following apply:

• You want to leave a larger legacy to a charitable organization that extends beyond your lifetime.
• You have the funds required to buy a life insurance policy and keep it in force throughout your lifetime.
• You have an existing life insurance policy that you no longer have a personal or business needs for.
• You have a large tax liability that you want to offset with a tax credit.
• You want to avoid leaving a bequest via your estate where it can be tied up for a long time or subject to estate litigation.