Life insurance helps you leave a legacy of philanthropy
Permanent life insurance is creates legacies for families and can for charities too. That’s one of the advantages you get. While donating life insurance may look appealing, there are pros and cons for you and your chosen charity.
Many donors, charities, and advisors have difficulty evaluating life insurance proposals for philanthropy.
You will find the basics in the Will Power Campaign, which is raising awareness about charitable gifts at death. We are founding partners in this initiative from the Canadian Association of Gift Planners (CAGP). CAGP has published separate multi-page guidelines for donors, advisors, charities and insurers. The need for these explanations shows the complexity of gifting life insurance.
- 1 Five reasons to use life insurance for your charitable giving
- 2 Three ways to donate your life insurance
- 3 Questions to consider
- 4 Does life insurance belong as part of your philanthropy?
Five reasons to use life insurance for your charitable giving
There are five major reasons to donate life insurance as part of your charitable giving strategy.
Life insurance donations give you leverage
You might not be able to donate $1,000,000 today, but can you afford the premiums for $1,000,000 of life insurance? Depending on how you structure the insurance, you could get charitable tax receipts for the premiums, which reduces the true cost of your gift. Your premiums are also lower when you are younger and healthier.
What about inflation? Since the charity will likely wait decades to receive the lump sum death benefit, the value of your gift keeps dropping in real terms. There is a solution: you can get life insurance with a death benefit that increases. That’s possible with whole life and universal life insurance. You can also have the premiums stop after a period of 10 or 20 years.
Life insurance donations give you privacy
Your Will is a public document. You can bypass the scrutiny of your Will and the delays of the probate process by making your gift privately. Life insurance gives you two options:
- Give at your death: name a charity as your beneficiary (or one of your beneficiaries), or
- Give during your lifetime: transfer your insurance policy to a charity during your lifetime
Life insurance donations give you flexibility
Besides doing good for your causes, you get donation tax receipts that reduce your tax bill. You select when to receive the receipts:
- Today: by donating your life insurance policy now
- Annually: by making ongoing donations to pay the future premiums on your 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 many assets transfer to your spouse tax-free and are taxed at the second death)
Life insurance donations let you recycle
Your need for life insurance generally drops as you grow your net worth (assets minus liabilities). If you cancel your coverage, the insurer wins because they didn’t pay out the death benefit.
You and a charity could win instead.
Recycle by donating temporary (“term”) or permanent life insurance you no longer need. You get a donation tax receipt based on the actuarial Fair Market Value. That could be higher than the cash value (if any).
There is a drawback when you donate inforce life insurance: you are fully taxed on the gain as if you cancelled your coverage (a deemed disposition). This reduces the value of the donation tax receipt.
Tip: Most of our clients have assets and do not have a strict “need” for life insurance. They tend to keep what their insurance (and get more) to satisfy wants.
Life insurance donations let you fund an endowment
Gifts of life insurance do not help a charity with their needs today because the death benefit likely won’t be received for decades. That’s fine because charities need help in the future too.
If you want, your lump sum death benefit could fund an endowment where the capital is preserved, and a portion of the investment income gets used each year.
Three ways to donate your life insurance
You can use life insurance charitably in three ways, each with pros and cons:
1. You own your life insurance and name the charity as the beneficiary
When you own your insurance policy for life, you:
- Maintain full control
- Benefit from all the tax advantages
- Get the most flexibility
You select a charity as the beneficiary, and you can change your mind at any time.
The charity receives the death benefit and provides a donation tax receipt to your estate to offset the large tax bill. You avoid probate fees (called Estate Administration Tax in Ontario) because using a beneficiary designation bypasses your estate.
However, you don’t get any donation tax receipts while you’re alive.
2. You own your life insurance, name your estate as the beneficiary and donate via your Will
Ideally, you would designate a charity directly since donating through your estate has no advantages over the previous method.
Instead, there are many disadvantages. Since the death benefit becomes part of your estate, probate fees apply, and creditors can make claims. Estate litigation can reduce the amount the charity ultimately receives. Delays occur. You also lose the privacy associated with a direct beneficiary designation.
3. You donate a new or inforce life insurance policy to the charity
When you donate a life insurance policy during your lifetime, you get donation tax receipts that reduce your tax bill now.
When you transfer your insurance to the charity and continue paying the premiums, you receive donation tax receipts for the premiums. However, the final death benefit does not give rise to tax savings because the charity owns the policy. You also lose control over the choice of the beneficiary and cannot make changes to 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 donation tax receipt, but you are taxed on the disposition. If your preferred charity only accepts fully paid-up policies, you won’t get future donation tax receipts.
What’s different about My Par Gift from Canada Life?
In March 2023, Canada Life introduced My Par Gift, a special participating whole life insurance product optimized for philanthropy:
- The charity is the owner and beneficiary from the outset: gives full control
- Your commitment is a one-time lump-sum donation: no future premiums required
- Nonguaranteed policyowner dividends may increase the death benefit the charity receives
We can help you see whether My Par Gift is right for both the charity and you.
Questions to consider
Do charities want donations of life insurance?
Did you ever get gifts you didn’t want? Would you have preferred a gift card with no strings attached?
Like you, charities prefer flexibility but don’t want to turn down gifts.
After you decide to be philanthropic, compare different ways of making your gifts. Also, ask the charity about their willingness to accept donations of life insurance and what structures they prefer.
Are charities equipped to accept and manage life insurance policies?
Charities prefer gifts of assets they can sell immediately. They then use the cash to spend or invest for the future. Charities can accept specialized gifts like art, land, and life insurance. That doesn’t mean they’re equipped to handle these gifts.
If you donate a life insurance policy (new or inforce), you likely want the charity to keep the coverage and receive the death benefit. This brings risks and costs that the charity may bear for decades.
Unless your life insurance is guaranteed to require no further premiums, the charity has the risk that additional funds may be required. Perhaps you will make donations, but perhaps you won’t.
Life insurance contracts require ongoing maintenance. That’s difficult for charities because of the differences between different products and insurers. Automation becomes difficult. Outside expertise may be required, which has direct or hidden costs.
Would life insurance be better used to replace your other donations?
If you find that donating life insurance produces suboptimal results for you or the charity (or both), you have another option.
Instead of donating an insurance policy to the charity, you could use life insurance to replace your donations. This is what our clients tend to do.
- Donate other assets (e.g., publicly-listed securities like shares or mutual funds). You could make a large donation once or spread your gifts over a period of years, depending on advice from your accountant.
- Get permanent life insurance with a face amount that matches the amount of your donation(s). Name your family members as the beneficiaries.
- Use the tax savings from your donations to fund the insurance premiums.
This approach can be better for the charity, your beneficiaries and you. You have flexibility because you maintain full control of the life insurance. You can fulfill your philanthropic goals without reducing how much your beneficiaries receive when you pass away.
This situation is easier to understand with visuals and numbers, which we can prepare for you.
What other ways could you use life insurance?
Besides making gifts to charities, you can also use life insurance to satisfy wants:
- Estate Bond: leave more for your beneficiaries after-tax
- Insured Retirement Plan: supplement your retirement income
- Immediate Financing Arrangement: get protection and investment flexibility
Does life insurance belong as part of your philanthropy?
Before donating life insurance, do take the time to understand the pros/cons for both you and the charity. We’re here to help.