Life insurance policies are valuable assets, even if the insured no longer has dependents or heirs to benefit from the insurance.
Charitable giving through life insurance not only benefits your favourite charity (or multiple charities) immensely, there are advantageous tax outcomes that accompany it.
Here’s an overview on how charitable giving through life insurance works, and the different ways to execute this approach.
Charitable donation tax credit rules in Canada
For donations made, the charitable donation tax credit for BC residents is 20.06% on the first $200 claimed and 45.8% on the portion of donations exceeding $200. Each province treats this slightly differently and is subject to change.
Structuring Life Insurance Policy ownership/beneficiaries
There are three primary methods in which individuals (referred to as the donor from here on out) can use a life insurance policy to benefit a charity:
- The donor can name the charity in their will. When the life insurance proceeds are paid to the estate, there is a charitable bequest made and the money flows to the charity.
- The donor can directly name the charity as the beneficiary of the life insurance policy.
- While alive, the donor can gift an in-force insurance policy directly to the charity.
There are logistical and tax factors to consider:
| Options | Pros | Potential Concerns |
Option 1: Charity named in will | – Donor continues to own the policy and maintains control while alive. – Donor receives a potentially substantial charitable donation tax credit. This happens when the insurance proceeds are paid out to the charity via the will. – The charity receives a lump-sum amount from the donor’s estate. | – Insurance proceeds will be subject to creditors of the estate as well as probate fees. – Gift will be public (no confidentiality). – No charitable donation tax receipt received during the donor’s lifetime for insurance premiums paid. – Less certainty for the charity as the donor can cancel the policy any time or alter the beneficiary designation. |
Option 2: Charity as Beneficiary | – Donor continues to own the policy and maintains control, similar to option 1 – Insurance proceeds flow outside of the estate due to beneficiary designation, meaning no probate fees or estate creditors. – Confidential. – Flexibility for the donor. – Charitable donation tax credit received on death, once the charity receives the insurance proceeds. | – No charitable donation tax receipt received during the donor’s lifetime for insurance premiums paid. – Less certainty for the charity as the donor can cancel the policy any time or alter the beneficiary designation. |
Option 3: Gift to Charity while alive | – Donor receives charitable donation tax credits when paying the premiums for the insurance policy. This will result in tax savings while alive as opposed to on death, as is the case with options 1 and 2. – If transferring ownership of an in force policy to a charity, the donor may receive an immediate charitable donation tax credit, based on the value of the policy. Specifics are beyond the scope of this article. | – Donor relinquishes control of the policy because the charity is the owner. – No charitable donation tax receipt received as a result of the death benefit. – Additional tax and planning complexities to implement. |
Charitable Giving through Life Insurance
The above examples are best suited for permanent life insurance policies (including T-100), as term life insurance expires. This strategy would have no impact if the insured (donor) does not pass away during the term of the insurance policy. Of course permanent life insurance, as the name applies, has no expiration, as long as the policy remains paid up.
This strategy is not limited to only one charity. If someone has multiple charities they support, there are easy ways to accommodate those wishes, especially if the donor goes with option 1 or 2. Lastly, there are opportunities for corporations to charitably give via life insurance policies. Of course, there are more complexities that are beyond the scope of this article – reach out and we can discuss it in more depth.
For more information, please contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.