Gift of a Life Insurance Policy to Charity
A gift of a life insurance policy to charity can be a strategic gift planning option for your clients if they desire to make a significant future donation.
Two Options to Consider
- Donating the ownership of the life insurance policy to charity immediately
- Retaining the ownership and naming the charity as the beneficiary of the policy
The difference between the two options is when your client receives their charitable donation receipt.
Charity becomes the owner of the Life Insurance Policy
This gift planning option works best if your client requires a donation receipt immediately.
- Your client irrevocably transfers the ownership of an existing life insurance policy to a charity. The charity owns the policy going forward.
- Your client receives a donation receipt for the fair value (FV) of the policy on the date of the ownership transfer.
- In some circumstances, the FV of the life insurance policy on the date of the ownership transfer might be higher than the cash surrender value (CSV). The age and health of the lives insured are two considerations that could impact the policy valuation and donation receipt. An actuarial assessment is required to determine if a donation receipt in excess of the CSV could be issued.
- If there are ongoing premiums to be paid on the policy, the charity is responsible for those payments as the owner of the policy.
- If your client chooses to continue making the premium payments on the donated policy, they would receive a donation receipt for any life insurance premiums they pay.
- When the policy matures, the life insurance proceeds are paid directly to the charity, as the owner of the policy. No donation receipt is issued to the donor’s estate for the proceeds from the matured policy.
Tax Planning Tips
- Your client will realize taxable income for the difference between the policy adjusted cost base (ACB) and the policy CSV.
- If the policy has a FV in excess of the CSV, the donation receipt will be issued for the FV.
- The difference between the policy CSV and the FV is not considered taxable income for your client, which results in a donation receipt in excess of their taxable income from the donation of the policy.
- This excess donation receipt amount can be used to offset other taxable income.
Example of a gift of a life insurance policy to charity
Heather has owned a life insurance policy for 47 years. Heather is 77 years old and no longer requires the life insurance policy for estate planning purposes. She wants to donate ownership of the policy to Abundance Canada. Here are the policy details on the date of the ownership transfer:
- Face Value: $1,000,000
- Cash Surrender Value: $200,000
- Fair Value: $750,000
- Adjusted Cost Base: $100,000
- Annual premium $2,500
Heather plans to donate $2,500 to Abundance Canada each year to cover the annual premium payment.
Heather will receive a donation receipt for:
- $750,000, the FV of the insurance policy on the date the ownership transfers to Abundance Canada.
- Any future donations she makes to Abundance Canada to cover the annual premium payment.
Heather will incur taxable income of $100,000 from the deemed disposition of the policy (CSV of $200,000 less $100,000 ACB).
Heather will have $650,000 of excess donation receipt above the taxable income from the policy disposition that she can use to offset other taxable income or perhaps fast track some estate planning strategies.
Charity is named a Beneficiary of a Life Insurance Policy
This gift planning option works best if your client needs a donation receipt in their estate, not immediately or during their lifetime.
- Your client names a charity as a beneficiary of the policy.
- Your client retains ownership of the policy; the charity does not own the policy.
- Your client could choose to divide the policy among several beneficiaries. One could be a charity and the other beneficiaries could be family members.
- If the beneficiary designations are revocable, your client can change the named beneficiaries in the future if their life circumstances change.
- Your client continues to pay the policy premiums going forward. A donation receipt will not be issued for premium payments because the charity is not the owner of the policy.
- When the policy matures, any life insurance proceeds the charity receives, as a beneficiary of the policy, will generate a donation receipt for the policy owner.
Tax Planning Tips
- Your client’s Estate receives a charitable receipt to help offset taxes owing
- The life insurance proceeds are paid directly to the named beneficiaries and do not flow through the Estate:
- Not subject to probate or estate administration fees
- Payments received by beneficiaries more quickly
- Not exposed to Estate creditors
Download a copy of the information sheet for donating a Gift of Life Insurance to discuss with your client.
Contact Abundance Canada if you have clients who might benefit from the donation of a life insurance policy.