Life Insurance as a Charitable Gift in Canada

Life insurance is often considered as a means of financial protection for one’s family, but did you know it can also be used as a charitable gift? By making a life insurance policy part of your financial planning, you can leave a lasting legacy with a donation to a charitable organization.

In this blog, we will dive into how life insurance can be used as a charitable gift in Canada so that, no matter which charity you are interested in donating to, you will have all the information you need.

In this article:

• How to use Life Insurance as a Charitable Gift
  • Donating Life Insurance Proceeds as the Owner and Insured of the Policy
  • Gifting a Charity a Life Insurance Policy
• Benefits of Life Insurance as a Charitable Gift
• Types of Life Insurance Suitable for Charitable Gifts
• Examples of Life Insurance as a Charitable Gift in Canada
• 5 Steps to Consider When Choosing a Charity
• Frequently Asked Questions (FAQs) About Life Insurance as a Charitable Gift

How to use Life Insurance as a Charitable Gift

When you decide to use life insurance as a charitable gift, be sure to pick a charity that aligns with your values and personal beliefs. This could include a charity that advocates for animal welfare, an environmental group, a cultural organization, a disease research center, a veterans organization, a hospital, a school, a volunteer group, a religious organization, and so on. It’s important to ensure the charity you choose is reputable and has an established track record of using donations effectively.

After choosing a charity, you can decide to either donate a portion of your life insurance policy’s death benefit amount (leaving some of the death benefit amount for other beneficiaries) or you can name the charity as the sole beneficiary of the policy. Upon your death, the charity will receive the death benefit from the policy.

Donating Life Insurance Proceeds as the Owner and Insured of the Policy

The first option you have is to donate a portion or the full amount of proceeds from your life insurance policy to a charity either through a will or by listing the charity as a beneficiary of the policy.

When you are the owner and the insured of a life insurance policy (as is standard) and gift the proceeds of the policy to a charity upon your death, the donation is deemed as being made by your estate at the time of donation. This means that under the graduated rate estate rules, the executor of your estate will be able to choose to apply the donation either within your estate itself or to your final tax years.

Choosing to donate the proceeds through a will means that the donation will face exposure to probate fees, potential delays in estate administration, challenges to the will, as well as creditor claims. While choosing to donate the proceeds through a will is still a valid option, it is often simpler to designate the charity as a direct beneficiary on your life insurance policy. Either way, while you will still be able to donate to a charity of your choice, donating the proceeds as the owner of the policy means you will be unable to receive a donation tax credit for the premiums you paid during your lifetime.

Gifting a Charity a Life Insurance Policy

Another option is to gift ownership of the life insurance policy to the charity of your choice. By choosing to transfer ownership of the policy to a charity you will be entitled to tax benefits, unlike if you remained the owner of the policy and chose to donate the proceeds instead.

If you have an existing life insurance policy you committed to but your life insurance needs have changed, it can be a good opportunity to gift the policy to a charity. Alternatively, you could choose to purchase a new life insurance policy that you intend to give to charity. Either way you will be entitled to a donation tax credit equal to the fair market value of the policy being gifted and a donation tax credit for any future premiums the donor pays for the policy.

The fair market value of the policy is determined by the Canadian Revenue Agency (CRA) by considering the following:

• The cash surrender value of the policy
• The value of any policy loans
• The policy’s face value
• The insured individual’s current health and life expectancy
• Any purchased life insurance riders
• The policy’s replacement value

It’s important to note that in order to gift a life insurance policy to a charity, the charity has to be willing to take over ownership of the policy. This means you should be sure to discuss your intentions with a representative of the charity and ensure that the donation will proceed as planned.

Benefits of Life Insurance as a Charitable Gift

Here is a look at some of the many benefits you will receive when choosing to use life insurance as a charitable gift:

Types of Life Insurance Policies Suitable for Charitable Gifts

There are a number of different types of life insurance policies that may be suitable for use as charitable gifts. Each type of policy has its own unique set of benefits, drawbacks, and considerations to keep in mind, so it is important to understand the different options before making a decision. Here is an overview of the features for each type of life insurance.

Term Life Insurance Features:

• Provides coverage for a specified term usually 10, 20, or 30 years.
• More affordable coverage than permanent life insurance policies.
• Provides a large death benefit for a relatively low premium.

Permanent Life Insurance

• Provides coverage for the entire life of the policyholder, as long as the premiums are paid.
• Many permanent life insurance policies have a savings component that builds up cash value over time and can be invested.

Examples of Life Insurance as a Charitable Gift in Canada

Here are some real life scenarios in which a person might choose to use a life insurance policy as a charitable gift in Canada:

5 Steps to Consider When Choosing a Charity

In order to ensure your donation has the maximum impact, here are some steps you should follow when choosing a charity to donate life insurance to:

1. Determine Your Goals and Values: When deciding on a charity, you should first identify what charities align with your personal interests, beliefs, and values.
2. Research the Charity: Next you should always be sure to look into the charity’s reputation, policies on transparency about donations, donation history (if available), and if there has been any previous scandals or negative press involving the charity.
3. Consider the Charity’s History: In addition to researching the charity, you should consider how long the charity has been established as longer standing charity’s are often more financially secure, as well as how impactful the charity has been towards the cause they support.
4. Review Donor Benefits: Before making a donation, you should look into what tax benefits you would receive and any incentives and benefits the charity may offer to donors.
5. Seek advice From a Financial Advisor: When choosing to donate life insurance to a charity, be sure to consult with an expert financial advisor so you can further understand what life insurance options can help you create the biggest impact and is best for your situation.

Frequently Asked Questions (FAQs) About Life Insurance as a Charitable Gift

Find the Right Solution for You and Your Family

If you are interested in using life insurance as a charitable gift in Canada and would like more information or advice specific to your situation, consider reaching out to one of our expert financial advisors. At Protect Your Wealth we’ve been helping clients find affordable and comprehensive life insurance coverage since 2007. Reach out to us today or call us at 1-877-654-6119 and we can help you find the right policy in no time.

We’re proudly based out of Hamilton, and service clients anywhere in Alberta, Ontario, Manitoba, and British Columbia, including areas such as Oakville, Abbotsford, Steinbach, and Grande Prairie.