Life insurance policies cannot only be left to an individual beneficiary, but can be donated to charity. Along with the satisfaction of knowing that you are leaving money to a worthy cause, donating your policy will also have certain tax benefits.
Donating your life insurance policy can be accomplished in 2 ways:
- The donor will either gift ownership of an existing policy to a charity, or;
- The charity will take out a policy on the donor’s life.
Note that in both scenarios the charity is actually the owner of the policy.
If an existing policy is donated, the cash surrender value of the policy minus any policy loans outstanding plus any accumulated dividends or interest is treated as the fair market value of that policy. This is the amount for which a tax receipt can be issued. Payment of the premiums due on the policy by the donor, which is owned by the charity are considered charitable donations. The charity can issue an annual tax receipt for these payments, whether they are paid by the donor directly or paid to the charity with instructions that the money is used to pay the premiums.
Where the premiums are paid by the charity, or by a donor on behalf of the charity, these payments are not considered to be a charitable expense and do not count towards meeting its disbursement quota. Investment income is not counted as part of income for disbursement quota purposes and therefore becomes very valuable to the charity.
If a donor takes out a policy and names his/her estate as beneficiary the donor can then direct the death benefits to go to one or more charities of his/her choice. While there is no tax relief for the payment of premiums, the individual will be eligible for a charitable donation tax credit on the proceeds distributed to the charity on their terminal return.
If a donor takes out a policy and names the charity as the beneficiary, the donor does not qualify for a charitable donation tax credit for premiums paid. The individual may, however, claim a charitable donation tax credit on their terminal return for the death benefit paid to the charity.
Finally, make sure to use a permanent life insurance policy (e.g. whole life), and not a term life plan. Term life is temporary insurance, and as such is not well suited for charitable gifting.
We hope you found this article about charitable giving and life insurance policies useful.
If you have any questions please feel free to contact us, as licensed, experienced Canadian insurance brokers we are here to help!