Gift of Life Insurance

Have you ever wished you could make a real difference, but found the reality of making a large donation to your favourite charity was not within your means? A meaningful contribution can be achieved through the gift of life insurance. This cost-effective method of donating to your favourite charity can create a future gift that is considerably larger than many donors would have been able to make during their lifetime.

A gift of life insurance allows you to pay, on average, only three or four cents on the dollar per year for a gift. An immediate cash donation of the same size would mean providing the full dollar amount.

When giving a gift of life insurance, you may:

• Assign as irrevocable or revocable a paid up policy to a charity.

• Assign as irrevocable or revocable a policy on which premiums remain to be paid. You may pay the premiums, or the charity will pay the premiums provided you make equivalent contributions for that purpose.

• Name the charity as a primary or secondary beneficiary.

An irrevocable gift

A gift of life insurance can be made on either an irrevocable or revocable basis. In the Sam example, Sam made his church the irrevocable owner and beneficiary of the policy. Because of this, he is entitled to a donation receipt for the premiums as they are paid. Sam can claim up to 75% of his annual net income.

If you transfer an older policy to a charity, you are entitled to a donation receipt for the cash surrender value. In some cases where the cash surrender value exceeds your costs (premiums paid) you may trigger a capital gain. You must report the gain as income. However, for 1996 and following years, any tax triggered by the capital gain will be eliminated by the increased tax credit.

Receipts may be issued whether you contribute premiums to a charity that in turn pays the insurance company, or pay the premium yourself. The charity should be provided with a letter or premium receipt from the insurance company showing that the premium has been paid before issuing a donation receipt.

The irrevocable gift may suit the older donor who has a policy that is no longer needed.

Example

Jack Barton is CEO and Chairman of the Board of a successful computer software company. Jack has been on the board of directors of his favourite charity for years and wishes to make a meaningful contribution. Jack’s mortgage is paid off, his children are grown and successfully on their own. He had taken the precaution of obtaining permanent coverage years ago to preserve his own estate, offset taxes and final expenses and provide his heirs with a tax-free legacy.

There is however, one policy of $100,000 that Jack no longer needs, and he has decided to designate the charity as owner and beneficiary. Upon his death, Jack’s estate will receive a charitable tax receipt for the full value of the policy while the gift stays outside of the estate thus avoiding probate.

A revocable gift

The revocable gift may be suitable if you wish to access the cash values or change the beneficiary designation, if family needs change.

When the charity is named as the beneficiary, but not the owner, then the death benefit is not guaranteed and the policy is considered revocable. You can provide a future gift while retaining full control of the policy.

No gift receipts are issued if insurance proceeds are paid directly to the charity.

Beneficiary designations

You may wish to name a charity as primary beneficiary of all or a fraction of the insurance proceeds. Or you may name the charity as a secondary beneficiary in the event that primary beneficiaries do not survive. Should you wish to make a beneficiary designation change, your life insurance agent will provide the necessary form.

Ways to reduce the premium

Whole life policies offer the “premium offset” option where dividends are used to pay the premium. With this method, the premium reduces on a yearly basis and the policy can be paid up in seven to ten years.

Joint-last-to-die policies have lower premiums. This has the potential of freeing up the capital to purchase a larger gift, or to simply reduce the cost of the gift. This may also be a solution where a joint gift is planned and one spouse is not insurable.

Some plans coming on the market can be paid up in as little as five years and are offered as guaranteed issue with no medical required. If the donor dies within the first two years, however, only the premiums paid are donated to the charity. There are some age restrictions to these plans.

Whole life policies become costly as you grow older. A solution might be a Term–100 policy. These can offer premiums which are guaranteed not to increase, guaranteed face amounts, guaranteed cash surrender values and paid-up values. These plans can be paid up in twenty years or sooner. Some have investment options which provide tax-deferred growth and increase the death benefit. Term–100 plans don’t pay dividends.

Ways to fund the policy

• The first way to fund your policy is by yearly, semi-annually, quarterly or monthly payments.

• If you do not require the income stream from your RRIF (Registered Retirement Income Funds) or annuity, it can be used to pay the premium.

• Use the one-pay option - depending on the insurance company - with or without the use of an annuity.

Charitable insured annuity

You can purchase an annuity from a life insurance company (and some charities) and use part of the monthly payments to pay the premium on a life insurance policy naming the charity as the owner and beneficiary. You will receive an income stream during your lifetime from the annuity as well as tax credits for the premiums paid. The charity will receive the life insurance proceeds.

Seek professional counsel

In order to understand the tax implications of your gift and ways to fund the policy, obtain professional guidance on the plan best suited to you.

Advantages to the donor

The motivation to make a charitable donation is rarely stimulated by the fact that there is an advantage to you, but rather by your desire to contribute to the common good.

It is important to be aware of some facts.

• Depending on your age, a small amount of premium could provide a large donation.

• Unlike your will which can be contested, a gift of life insurance is certain to go to the person or charity that you wish.

• There are tax advantages to people who give. Both by giving a paid up policy or by creating a new policy and paying premiums, you will be entitled to a tax receipt once the gift is structured properly.

• Such gifts remain outside the estate and do not affect other assets intended for family members. They do not inflate the size of the estate, and therefore estate settlement costs will not increase. The donor’s estate is entitled to a tax credit up to 100% of net annual income. Any excess can be carried back to the immediate preceding year.

Advantages for charities

• The gift is substantially higher than normal periodic donations would provide.

• Payment to the charity is guaranteed by the life insurance company when the gift is irrevocable.

• The benefit is paid immediately upon death of the donor with the minimum of formality and cannot be contested.

• The gift is not subject to claims by the donor’s creditors.

A Final Word

The items contained herein have been reviewed by expert financial and legal counsel and are believed to be accurate interpretations of federal tax law. You should be sure, however, to consult with your own legal advisors about the applicability to your situation.  

The information presented here is a general overview and is not a substitute for professional advice. The authors and editors are not responsible for the results of any actions taken on the basis of information presented here, nor for any errors or omissions.

For more information please contact us by calling us at 519-837-6422 or by email at foundation@gghorg.ca.