Maximizing Your Charitable Impact with Life Insurance as a 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 in Canada? By making a life insurance policy a part of your estate plan, you can leave a lasting legacy to a charitable organization and make a significant impact. In this blog, we will explore the concept of life insurance as a charitable gift, its benefits, and the impact it can have in Canada. Whether you are looking to donate a portion of your estate or make a significant gift, this blog will provide insights into how life insurance can help you achieve your charitable goals.

In this article:

• Understanding the basics of Life Insurance as a Charitable Gift
• The Tax Benefits of giving Life Insurance as a Charitable Gift
• Types of Life Insurance policies suitable for Charitable Gifts
• How to make Life Insurance be a Charitable Gift
• Making a Present Gift of a Life Insurance Policy
• Delayed or Deferred gift of a life insurance policy
• Charitable Insurance Annuity 
• The impact of Life Insurance as Charitable Gifts in Canada
• Real-life examples of Life Insurance as Charitable Gifts in Canada
• The role of charity organizations in facilitating Life Insurance as Charitable Gifts
• Choosing the right charity for your Life Insurance as Charitable Gift
• Frequently Asked Questions (FAQs)  about Life Insurance as Charitable Gift

Understanding the basics of Life Insurance as a Charitable Gift

Life insurance is a versatile tool that can serve multiple purposes, including providing financial security for loved ones, accumulating wealth, and making a charitable impact. In Canada, life insurance can also be used as a charitable gift, providing numerous benefits to the donor and the charitable organization. Understanding the basics of life insurance as a charitable gift is crucial for anyone who is looking to make a meaningful contribution to a cause they care about. In this blog, we will explore the basics of life insurance as a charitable gift, including how it works, the benefits of giving, and how it can be a powerful tool for individuals and organizations alike.

When you make a gift of life insurance, you can either donate an existing policy or purchase a new policy and name the charity as the beneficiary. The charity will then receive the death benefit from the policy when you pass away. This type of gift provides many advantages, including the opportunity to make a significant impact with a relatively small investment, the ability to make a gift without affecting your current financial situation, and the ability to enjoy tax benefits. Furthermore, life insurance as a charitable gift is often more efficient than other types of gifts because the charity does not have to pay estate and probate fees, and the money is distributed directly to the charity, without any delays or administrative costs.

Another advantage of life insurance as a charitable gift is the flexibility it offers. You can choose the type of policy that best fits your needs, whether it be term, whole life, or universal life insurance. You can also determine the amount of the death benefit, which can be adjusted over time to reflect changes in your financial situation or the needs of the charity. Additionally, if you choose to donate a new policy, you can take advantage of the tax benefits that come with it.

Overall, life insurance as a charitable gift is an excellent way to make a meaningful contribution to a cause you care about. By providing financial security for your loved ones, accumulating wealth, and making a charitable impact, life insurance can be a powerful tool for individuals and organizations alike. Understanding the basics of life insurance as a charitable gift is crucial for anyone who is looking to make a positive impact on the world. Whether you are looking to provide financial security for your family, accumulate wealth, or make a charitable contribution, life insurance can be an excellent tool to achieve your goals.

The Tax Benefits of giving Life Insurance as a Charitable Gift

Donors who make a charitable gift of a life insurance policy are eligible for two tax benefits: 

1. A tax credit equal to the policy’s fair market value 
2. A tax credit for any additional premiums the donor pays in the future.

The value of a life insurance policy for tax purposes (known as fair market value or FMV) can be complex to determine and is based on various factors such as the policy’s cash value, loans, face value, and health of the insured. An actuary or valuation professional is recommended for accurate evaluation. The Canadian Revenue Agency provides guidelines for determining the FMV. Subsection 248(35) of the Income Tax Act considers the FMV of the policy in the case of gifts made within 3 years of purchase or within 10 years if the intention was to donate. The act also considers gifting a life insurance policy as a disposition, which may result in a taxable gain if the policy’s cash value exceeds the adjusted cost base.

Giving life insurance as a charitable gift can offer significant tax benefits for individuals in Canada. One of the key benefits is the ability to claim a tax receipt for the full premium paid, making it an effective way to reduce taxable income and increase tax savings. In addition, if the policy owner designates the charity as the beneficiary, the entire death benefit is received tax-free by the charity, which can greatly increase the impact of the gift. For donors who have already purchased life insurance policies, a charitable gift can be made by assigning the policy to the chosen charity. 

Another tax benefit is the option to donate a policy that has a significant cash value, which can also result in a substantial tax receipt. This type of gift is particularly beneficial for donors who have built up a policy with a large cash value generally with whole life or universal life insurance, but are no longer able to pay the premiums. By donating the policy, they can receive a tax receipt for the cash value and avoid having to pay the premiums themselves.

Furthermore, the donation of a life insurance policy can also provide estate tax benefits. By designating a charity as the beneficiary of a policy, the death benefit is not included in the donor’s taxable estate, which can reduce estate taxes and provide a greater benefit to their heirs.

Giving life insurance as a charitable gift in Canada offers several tax benefits that can make a significant impact for both the donor and the charity. By reducing taxable income, increasing tax savings, and reducing estate taxes, a life insurance policy can provide a valuable and long-lasting legacy for both the donor and the chosen charity. Before making a gift, it is important to consult with a financial advisor to determine the best options and maximize the benefits of the 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.

The first type of life insurance policy that is commonly used as a charitable gift is a term life insurance policy. This type of policy provides coverage for a specified period of time, usually 10, 20, or 30 years. It is generally the most affordable type of life insurance policy, and provides a large death benefit for a relatively low premium. This makes it a popular option for those looking to make a charitable gift.

Another type of life insurance policy that may be suitable for use as a charitable gift is a permanent life insurance policy. This type of policy provides coverage for the entire life of the policyholder, as long as the premiums are paid. Permanent life insurance policies often have a savings component that builds up cash value over time, which can be used to help pay the premiums or borrowed against.

Another type of life insurance policy that may be used as a charitable gift is a whole life or universal life insurance policy. This type of policy provides the policyholder with the ability to invest the premium dollars in a variety of investment options, such as stocks, bonds, and mutual funds. The death benefit and cash value of a variable life insurance policy will fluctuate based on the performance of the underlying investments.

It’s worth mentioning that some charitable organizations may accept gifts of life insurance policies that are no longer needed or wanted. For example, if you have a life insurance policy that you no longer need, you may consider donating it to a charity. The charity can then use the death benefit to further its mission.

There are a variety of life insurance policies that may be suitable for use as charitable gifts, each with its own unique set of benefits and drawbacks. It is important to carefully consider your individual needs and circumstances when choosing a life insurance policy to donate to a charity, in order to ensure that the gift meets your charitable giving goals.

How to make Life Insurance be a Charitable Gift

There are a few steps to follow when making a life insurance policy a charitable gift. Firstly, it’s important to choose a reputable charity that aligns with your values and has a good track record of using donations effectively.

Next, you need to determine the type of life insurance policy that is best suited to your needs and goals. There are two main types of life insurance policies that can be given as charitable gifts – term life insurance and permanent life insurance. Term life insurance is often used as a simple and cost-effective way to provide a death benefit, while permanent life insurance can provide both a death benefit and cash value that grows tax-free over time.

Once you have selected a policy, you can either donate a new policy or transfer ownership of an existing policy to the charity. If you choose to donate a new policy, the charity will become the owner and beneficiary of the policy. This means that the death benefit will be paid to the charity when you pass away. If you choose to transfer ownership of an existing policy, the charity will become the new owner and beneficiary, and you can claim a tax receipt for the fair market value of the policy.

In order to maximize the tax benefits of a charitable gift, it is important to seek the advice of a qualified life insurance broker who can help you determine the best way to structure your gift and ensure that it meets all legal requirements. Additionally, it is important to consider your own financial situation and to make sure that you can afford the premiums required to keep the policy in force.

It is important to remember that making a life insurance policy a charitable gift is a long-term commitment. While it can provide significant benefits to both you and the charity, it is important to understand the terms and conditions of the policy and to make sure that you are able to meet the premiums payments over time. With the right planning and guidance, life insurance can be a powerful tool for supporting the causes you care about and creating a positive impact in your community.

Making a Present Gift of a Life Insurance Policy

Donating a life insurance policy is a unique way to make a charitable gift. To do so, you simply name the chosen charity as both the owner and beneficiary of the policy. If you already have a policy in place, you can donate it by receiving a tax receipt for the policy’s cash surrender value, plus any accumulated dividends or interest, minus any outstanding loans. It’s important to note that if the cash value of an older policy exceeds your adjusted cost basis, you’ll still be able to receive a donation receipt for the cash value but will need to report the gain as income.

In the future, you’ll also receive contribution receipts for any premiums paid to keep the policy in force. This allows you to leverage a smaller current gift into a larger future sum. When you pass away, the life insurance proceeds are paid directly to the charity, bypassing probate taxes, and keeping the gift private and more quickly available to the organization. By owning and being the beneficiary of the policy, the charity can take advantage of the tax benefits associated with a life insurance policy, allowing your gift to have an even greater impact.

Delayed or Deferred gift of a life insurance policy

To make a deferred gift of a life insurance policy, you would name a charity as the beneficiary of your policy but maintain ownership and continue paying the premiums yourself. In this scenario, the death benefit would pass outside of your estate and not be subject to probate taxes.

While there is no immediate tax benefit for the premiums you pay, you will be eligible for a charitable donation tax credit (when you pass away) based on the amount of the death benefit paid to the charity by the insurance company. However, the amount of the credit will be limited by the taxable income on your final income tax return. Any excess charitable donations can be carried forward to the previous year.

Charitable Insurance Annuity

If charitable giving is a part of your financial plan, the Charitable Insured Annuity may be a suitable option for you. This strategy involves purchasing an annuity to generate a reliable income stream and obtaining a life insurance policy. The insurance policy is donated to a charity, who becomes its owner and beneficiary, while a portion of the annuity income is gifted to the charity to cover the life insurance premiums and any taxes. The individual’s premium payments qualify for a charitable donation tax credit, which increases their income through tax savings calculated at their marginal tax rate (the credit amount varies by province). This option offers both lifetime benefits of income and tax savings and posthumous benefits to the charity through the life insurance proceeds.

The impact of Life Insurance as Charitable Gifts in Canada

Life insurance charitable gifts are a popular way for individuals in Canada to make a meaningful impact on the charities they care about. This type of donation involves naming a charity as the beneficiary of a life insurance policy, and it can have a significant impact on the charity, both financially and strategically.

From a financial standpoint, life insurance gifts provide a larger, more substantial gift to the charity compared to an annual donation of the same amount. The charity will receive the death benefit of the policy tax-free, and in many cases, the premiums paid by the donor can be claimed as a tax credit, reducing the overall cost of the gift.

In addition to financial benefits, life insurance gifts can also help charities plan for the future. This type of gift provides a reliable and predictable source of funding that can be used to support ongoing programs and initiatives. Charities can also use the death benefit to fund new projects, hire staff, and invest in infrastructure and technology.

Life insurance gifts can also have a positive impact on the donor’s estate planning. By naming a charity as the beneficiary of the policy, the death benefit will not be subject to probate taxes and will pass outside of the donor’s estate. This can help the donor’s family avoid a significant portion of taxes and administrative costs, leaving more for their loved ones.

Real examples of Life Insurance as Charitable Gifts in Canada

In each of these examples, the individual or organization is able to support a charity that is important to them, while also taking advantage of the tax benefits and other advantages associated with life insurance charitable gifts. By making a life insurance charitable gift, individuals and organizations can make a meaningful impact on the causes they care about, and leave a lasting legacy for future generations.

• An individual donates a life insurance policy to their favourite charity, naming the organization as the beneficiary. This allows them to make a significant gift to the charity, which would otherwise not have been possible during their lifetime.
• A family sets up a life insurance policy in honour of a loved one who has passed away, with the death benefit going to a charity that supports a cause the deceased was passionate about.
• A business owner donates a portion of their life insurance policy to a charity that supports environmental conservation, allowing them to leave a legacy that aligns with their values and helps protect the planet.
• A retired couple donates a life insurance policy to a local community foundation, which invests the proceeds and uses the income generated to support a variety of charitable causes.
• An individual sets up a charitable gift annuity, in which they make a contribution to a charity in exchange for a guaranteed lifetime income stream. Part of the contribution is used to purchase a life insurance policy, with the death benefit going to the charity.
• A family sets up a charitable remainder trust, in which they transfer ownership of a life insurance policy to a trust. The trust then pays income to the family for a specified number of years, with the death benefit going to the charity upon the death of the last remaining beneficiary.

The role of charity organizations in facilitating Life Insurance as Charitable Gifts

Organizations provide a platform for individuals who wish to make a meaningful impact on society by making a donation through their life insurance policy. The process is simple and straightforward as the individual designates the charity as the beneficiary of their policy and the charity receives the death benefit upon the individual’s passing.

Charitable organizations in Canada also provide valuable resources and support to individuals looking to make a life insurance charitable gift. They provide information on the benefits of giving through life insurance and help donors understand the process and the tax implications. Additionally, life insurance brokers have the expertise to help individuals select the most appropriate type of policy based on their financial goals and charitable intentions.

Charity organizations play a vital role in ensuring the effectiveness of life insurance charitable gifts. By carefully managing the death benefits received, they can ensure that the funds are used for the intended purpose. This can help increase the impact of the donor’s gift and support the continuation of the charity’s mission.

Choosing the right charity for your Life Insurance Charitable Gift

Determine your philanthropic goals and values: Identify causes that align with your beliefs and values.

Research the charity: Check its reputation, financials, transparency, and impact

Assess the charity’s focus and use of funds: Make sure the charity is using its funds in a manner consistent with your goals and values.

Consider the charity’s history and sustainability: Look into the charity’s track record and stability to ensure it will be able to continue its mission into the future.

Review donor benefits: Consider the tax benefits and other incentives offered to donors.

Seek advice from our life insurance brokers: Consult with our brokers or financial advisors for their opinions on the charity you are considering.

Conclusion: Maximizing Your Charitable Impact with Life Insurance Gifts in Canada

In conclusion, life insurance gifts offer a unique opportunity to maximize your charitable impact in Canada. By donating a life insurance policy, you not only make a significant contribution to a cause you care about, but you also receive tax benefits that can further increase your impact. It is important to understand the complexities involved in determining the fair market value of a life insurance policy, for which you may want to seek the help of a life insurance and financial planning professional. 

Additionally, be mindful of the deeming provisions under the Income Tax Act, which can affect the value of your gift. By considering all the available options, you can maximize your charitable impact and create a lasting legacy. By giving through life insurance, you can create a more significant impact than what could have been possible through other types of gifts. With careful planning, a life insurance gift can be an excellent way to support the causes that matter to you.

Frequently Asked Questions (FAQs)  about Life Insurance as Charitable Gift

Contact us now to learn more about Life insurance for charity

Now that you have read our blog on Maximizing Your Charitable Impact with Life Insurance as a Gift in Canada, it is worth looking into your options and how you can donate how you want to. At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.

To schedule a consultation about your investment goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta  including areas such as Kingston, Coquitlam, Calgary, and Grand Prairie.