Using Insurance as a Charitable Donation

Many of us want to help the less fortunate or want to give back to an organization that has helped us in our lives. I've discussed, in my earlier posts, about using insurance as a means of personal/family protection as well as briefly touching upon the ability to grow money tax-sheltered. In this post I will discuss one of the other uses of insurance, which is using it as a charitable donation.

There are many people in society who either don't have dependents or any person(s) that they want to leave money for after they pass away, but have a favourite charitable organization or religious group etc... that they would love to leave money for. Many are regular donors to these organizations or charities and want to continue their giving even after they pass on. Some people will include the organizations name(s) in their will to have their assets given to one or more of their chosen organizations, but some might not be able to give as much money as they want due to lack of savings or pre-mature death. In cases like this, using an insurance policy as a means of leaving money for a charity/organization can be a great way to do that!

A person can make a substantial contribution to any charity by naming the organization as a beneficiary. Most likely, the amount they leave behind will be larger then any amount they would be able to afford on their own, so it is an easy and affordable way to make a generous contribution at the time of death.

Tax Advantages

There are usually tax advantages when you donate/contribute to a registered charity, and this situation is no different. All proceeds will go directly to the beneficiary, since we know that life insurance policies will pay out tax-free.

Having the tax-free proceeds being paid to the charity is great, but that is something that happens after death, so, what other advantages are there during life? Well, the premiums that are paid can actually be deducted from the annual income as an itemized deduction. So in this way, there are tax advantages both before and after death!

In order for this to be official, the policy's rights actually have to be signed over to the organization, and all the documents be delivered to them. All this means is that, the organization must be consulted before any change to the policy itself.

Other Details

By signing over the policy to the organization (basically making them the owner), the proceeds are not included in estate of the person who has passed away. If the policy is not passed over to the organization, but just has the organization as the beneficiary, the proceeds will be included in the estate's worth, even though the funds will be going directly to the organization. This could result in much higher taxes for the estate and might leave less money for other beneficiaries from the estate (i.e. family).

Other Options

Getting a new insurance policy might be something that is not affordable by everybody, so what other ways can be used to leave money through a policy? One way is, if someone has an existing policy, to have the dividends paid out by the policy (if there are any) to be allocated to the organization itself, rather then re-invested back into the policy (or given as cash). This can be done by contacting the insurance broker or the company who provided the policy, and they can check to see if it is possible with the policy that is already in place.

Another option is to add the organization as a beneficiary to an existing policy, which will still allow to make a large contribution, but won't cause any extra taxes since the existing policy would have been added to the estate anyways -- the only thing that would be done is splitting up where the funds are allocated at the time of death. The amount of donation given can actually be deducted from the gross estate of the person who has passed away (there will be a charitable donation tax credit for the amount of contribution), which is something that would benefit the heirs of the estate. However, using this option, where the life insured is still the owner of the policy, the premiums cannot be deducted by the life insured from their annual taxes.

Using an RRSP/RRIF

Another way to leave money for a charity is to designate them as the beneficiary of an RRSP or RRIF, and then buy an insurance policy equivalent to the value of the RRSP/RRIF. At the time of death, the charity will issue a tax receipt which will offset the tax burdens, and then the estate will receive the life insurance proceeds tax-free.

Wealth Replacement Insurance

This is a very interesting way to use existing assets and insurance to donate money, lower your tax bill, and accumulate more wealth overall. This is something I actually got from http://lsminsurance.ca/tips/general/charity-life-insurance . I will just copy and paste it:

This is a creative option which allows you to donate a large asset or lump sum of money to charity. In return, you receive a charitable credit for the donation which results in tax savings for the year the donation is made. You can then invest these tax savings in an insurance policy that potentially results in enough proceeds to replace the value of the gifted property.

Let's look at an example of the last method.

Mrs. Jones own a piece of land that originally cost her $100,000. It is now worth $300,000. She donates the land to charity and receives a donation receipt for $300,000, which will equate to tax savings of approximately $138,000 (assuming a 46% marginal tax rate).

Mrs. Jones incurs a taxable capital gain on the disposition of the land of $100,000 (50% of $300,000-$100,000) resulting in tax payable of $46,000. However, the net tax savings of $92,000 could be used to fund a life insurance policy on Mrs. Jones producing a potential tax free death benefit for her heirs in excess of her original donation.

Annuities

A charitable gift annuity allows someone to give a lump sum contribution to a charity, but still receive guaranteed periodic income in return (usually monthly). Generally, the older the person is at the time of donation, the higher the returns will be.

Using this strategy, keep in mind that the donations are irrevocable, which means, once they are given, they cannot be taken back and the control of those funds is no longer there.

A tax receipt will be issued for the amount the gift exceeds the total annuity payments made to the donor (calculated by Canada Revenue Agency's life expectancy tables). Also note, that most (or all) of the income that is received is tax-free.

Using the life insurance strategy can be used with either term or permanent life insurance policies, so it can be used for short term and long term plans. If this is something that interests you, please consult an advisor to get more information on all the details.

I hope you have learned something from this post, and if you have any questions, please do not hesitate to contact me.