Charitable Giving With Life Insurance
Is philanthropy part of your legacy?
Our most precious gift is our time. When we’re gone, we can’t help charities in person but we can leave significant financial support. Life insurance is an ideal way to leave a legacy.
Six reasons to use life insurance for charitable giving
There are 6 major reasons to use life insurance for charitable giving:
Leverage: small insurance premiums buy a large death benefits, especially when you’re younger and healthier
Privacy: your donation escapes scrutiny when you bypass your Will and estate by:
naming a charity as your beneficiary, or
transferring your policy to a charity while alive
Flexibility: you can receive tax credits at three different times
today: by donating your policy now
annually: by paying the future premiums on the donated policy (which the charity will appreciate)
at death: to reduce the taxes payable on your estate (or the estate of your surviving spouse since some assets transfer tax-free and are taxed at the second death)
Recycling: You can donate life insurance you no longer need instead of cancelling it. You then get a tax credit based on the actuarial Fair Market Value of your policy. This can be higher than the cash surrender value (if any).
Proven: Life insurance donations form an important and well-established funding stream for endowments
Certainty: You’ll have peace of mind knowing you’ve left a lasting legacy.
Three ways to donate your life insurance
You can use life insurance charitably in three ways, each with their own characteristics:
1. You own the policy and name the charity as the beneficiary: this gives you the most flexibility and control.
You continue making decisions about your coverage. You select the beneficiary and can change your mind. The charity receives the death benefit and provides a tax credit to your estate. You avoid probate fees (called Estate Administration Tax in Ontario) because the beneficiary designation bypasses your estate. However, you don’t get any tax credits for the premiums you pay.
2. You own the policy, name your estate as the beneficiary and give instructions in your Will: ideally you would designate a charity directly.
Donating in this way has no advantages over the previous method. Instead, there are many disadvantages. Since the death benefit forms part of your estate, probate fees apply and creditors can make claims. Estate litigation can reduce the amount the charity ultimately receives. You also lose the privacy associated with a direct beneficiary designation.
3. You donate a new or inforce policy to a charity: this is the ideal method if you’d rather receive an annual stream of tax credits instead of a one-time tax credit for your estate.
When you transfer the policy to the charity and continue paying the premiums, you receive tax credits for the premiums. However, the final death benefit does not give rise to a tax credit since the charity owns the policy. You also lose control over the choice of beneficiary, and the ability to change the policy. You can never regain control of the policy, either.
The actuarial Fair Market Value of your policy at the time of transfer also generates a tax credit. If your preferred charity only accepts fully paid-up policies, you won’t get ongoing tax credits.