How your Life Insurance can Help your Favourite Charity
July 11, 2016 | Updated October 25, 2018
The gifting of life insurance to registered charities has always been a popular method for individuals to fulfill their philanthropic goals, and worth considering when it comes to a charity that is near and dear to your heart.
There are basically two options when donating life insurance to a charity: donate a policy while you are alive or make the registered charity a beneficiary of the policy. The option selected will depend on many factors.
If you make the charity a beneficiary of your life insurance policy, you retain control over the policy and can change the beneficiary if circumstances change in the future. A donation receipt equal to the amount of the death benefit will be available on your passing. New rules were introduced for certain estates that allow the executor flexibility to decide whether the donation should be used in the tax filings of the deceased or by the estate, to maximize the use of the donation.
The other option is to transfer a policy to a charity while you are alive. In this circumstance, you receive a possible donation receipt on the transfer and if you continue to pay the premiums, then you receive a donation receipt for the premiums paid. There is a disposition of the policy on the transfer resulting in possible income tax based on the cash surrender value and adjusted cost basis of the policy. If, at the time of transfer, the policy has a fair market value in excess of the cash surrender value, which could be due to a change in health, you could receive a donation receipt equal to the fair market value. In this case, the value of the donation receipt could be in excess of the proceeds for calculating the taxable gain on disposition (the cash surrender value) and can be used to offset other income. However, not all charities are allowed, under their constitution or investment requirements, to acquire a life insurance policy, and, therefore, it is important to discuss the donation of the life insurance with the charity and understand their requirements and restrictions. For guidelines and best practices for donating life insurance policies, please see the resources created by the Canadian Association of Gift Planners [Charitable Donations of Life Insurance – CAGP Guidelines].
If you have a policy that is no longer needed, rather than surrendering the policy, consider transferring the policy to a charity… it could be a win-win for you both!