Gifts of Life Insurance

Life insurance products are useful for gift planning because they are given special tax treatment

There are several gifting strategies involving Life Insurance, described below along with the donor and charity scenario in which it can be most effective.

1. Existing life insurance policy (ownership transferred to charity)

This is an attractive option for donors who have an older policy that is no longer needed for its original purpose, or for those who want to make a large gift but have limited resources. The benefits are (1) the donor receives a tax receipt for the fair market value of the policy at the time of the donation, and for any future premiums paid; (2) for a relatively small sum, the donor can ensure a large future gift for their favorite charity; (3) if premiums are still required, then all future premiums paid by the donor are eligible for a tax receipt; AND (4) the death benefit will bypass the estate thus avoiding probate and legal challenges for the donor.

2. Purchasing a new policy and transferring ownership and beneficiary

With this method, it is not the policy that is gifted, but the premium. All premiums paid will qualify for a tax receipt. In this case, the death benefit is not considered for tax receipt purposes, only the premiums.

3. My Par Gift

Canada Life’s My Par Gift is a new life insurance product where the donor pays a single premium and a charity is named the owner and beneficiary of the policy. The donor receives a donation tax receipt, and the charity has the flexibility to receive the tax-free death benefit when the insured person passes or to access the cash value during the lifetime of the donor, or a combination of both. This method is helpful for donors interested in making a one-time, tax receipt eligible, donation that can grow over time, with a certain level of guaranteed growth.

4. Making a bequest of life insurance proceeds to pass to the charity through the donor’s will

This method is useful for donors looking to reduce taxes on their estate and do not mind probate fees. “A bequest donor can claim charitable donations up to a maximum of 100% of his or her income in the year of death and the previous year (to the extent that there is excess contribution room). With insurance, the death benefit is not taxable. Therefore, by naming the estate as beneficiary of the policy, the insured can inject a large sum of tax-free cash to pay off legal bills, taxes, or even to make charitable gifts… The insurance death benefit merely provides the means to make the payment.”

5. Making a charity the beneficiary of an existing policy

This method is commonly used by people who might be inclined to give, but whose personal and family needs may be subject to change and therefore would hesitate to transfer ownership of a policy to a charity. The benefits to the donor in naming a charity a beneficiary but not owner of their life policy are: (1) they are able to make a future gift to their charity; (2) they retain access to the cash value; and (3) they maintain control over the gift as they are able to change the beneficiary in case family circumstances change. The donor names the charity as beneficiary, and upon his or her death, the insurance proceeds are paid to the charity, and the tax receipt is issued to the deceased.

To learn more check out our PDF on Gifts of Life Insurance, or explore these resources from CAGP.