Charitable Gifting using an existing Life Insurance Policy

In times like these, many charities are facing difficulty raising funds for our communities.  Perhaps you are an individual who would like to make a meaningful donation to your favourite charity or non-profit society, but your monthly cash flow does not allow it.

An interesting concept that has been around for decades has gained traction as more individuals have reconsidered what to do with their old life insurance policies.  If properly structured, a charity can receive a substantial donation, leaving the individual with the feeling that they have made a meaningful difference.  At the same time, the donator can receive a tax receipt to make a “Win-Win” for all concerned.

So how can this be done?

 Designate the charity as a beneficiary on a new or existing policy.  

The insured’s estate will receive a charitable tax donation receipt for the face amount of the policy. This tax deduction receipt can be used by the executor as a Tax Credit on the deceased person’s final tax return.  The charity receives a substantial tax-free donation to be used to further fund their programs.

 Transfer a new or existing policy to the charity with a pledge to pay the premiums for a year.

  • You receive a charitable tax receipt for premiums paid each year. If the policy contains any cash values, the transferred amount would be considered as a donation and tax credit would be applicable.
  • No tax receipt is issued for the proceeds of life insurance on the death of the insured.

Why else would this strategy be used?

  1. In situations where the individual has no surviving spouse to roll tax-free proceeds of their RRSP or RRIF to upon death, this approach can work nicely as a charitable donation.

On death, the charity issues a charitable tax receipt that offsets the tax impact of the RRSP/RRIF proceeds.  The purpose is to leave the estate more “whole” so that surviving children, or other beneficiaries, do not face a situation where they would lose up to 50% in taxes.

  1. A wealth replacement strategy allows the individual to donate a large asset (real estate or stocks) to a charity, however, they replace the asset with the proceeds of a life insurance policy for their heirs. The heirs receive a Charitable Tax Credit for the original donation made and then re-invest the tax savings in an insurance policy.  The big gain is that the tax-free death benefits payable to the heirs are usually enough to replace the value of the gifted property.

 Benefit summary of using a life insurance strategy

  • You or your estate benefit from income tax relief now or in the future.
  • Life insurance significantly amplifies the amount of your charitable gift.
  •  Your charitable gift does not impact the bequests to your family. With no need to earmark a portion of your estate for charity, it remains intact for your family.
  • You have the satisfaction of knowing you are giving something back to an alma mater, local hospital, foundation, or preferred charity.
  • You can create a lasting memorial to your life or the life of a loved one.