Strategically taking advantage of life insurance as a donation tool is one way some people leave behind a memorable legacy.
Giving by way of life insurance can be as simple as this: make your church or any eligible Canadian registered charity the beneficiary or owner of a new insurance policy purchased specifically to make a powerful gift. Or you can use an older policy that has outlived its original purpose so that, at your passing, the beneficiary will receive the full death benefit of this policy.
A reason many find compelling for giving through insurance is that the legacy gift will be significantly larger than the sum of the premiums. And there are many other benefits of giving in this way.
1) Setting up your policy is free.
There are no fees to set up a new life policy or amend an existing policy to make your charity the beneficiary of your generosity.
2) Tax relief.
When you make a charity the owner and beneficiary of a policy, all premiums are tax deductible. The charity will send you charitable tax receipts equal to the cost of your premiums. If you donate a paid-up policy, you may receive a tax receipt for its entire fair market value. If your premiums and other annual charitable gifts are more than $200 in total, you can significantly reduce your income taxes owing (tax credits vary by province and various other conditions).
3) Estate tax relief.
When you make a charity the beneficiary (not owner) of a policy, your estate will receive a tax receipt for the entire death benefit received. Your estate can benefit from a large tax deduction that will reduce estate taxes. That often allows you to give more to charities and leave more to heirs. In this scenario, premiums are not tax deductible.
4) A gift of life insurance happens outside of your estate.
Within two to three weeks of an executor informing the insurance company of your passing, your insurance gift will go directly to your charity. It is excluded from the probate process and won’t be reduced by any probate fees or final tax payments.
5) You don’t have to change your Will to leave a meaningful legacy.
Gifts of insurance need not be mentioned in your Will, but you should leave instructions with your executor to inform your insurance company of your passing, ensuring your donation is made in a timely manner.
6) Your gift can be made privately.
If you want to keep your gift private, between yourself and a charity, the only other person who needs to know about it is your executor.
When purchasing a new policy to use as a charitable gift, there are several options. Gifts of insurance are a specialized area. To find the best fit for your situation, it is recommended to consult an insurance broker who is experienced in using life insurance for charitable giving.
Consider purchasing a policy that can be completely paid off in a fixed time period. “Short pay” policies are easier for charities to manage and they provide peace of mind, knowing that you won’t feel burdened with the premiums in later years.
If you have considered setting aside a lump sum of money that you’ll designate to a charity (charities) in your Will, it may be worthwhile to explore the option of using that money now to buy and donate a fully paid-up life insurance policy that will grow in value over your lifetime. By doing this, you don’t need to come up with additional resources to multiply your gift and have a much greater impact on the good works of your charity!
And that gives you real power to change the world.
(Bergmans is a Certified Financial Planner, the President of Bequest Insurance and co-author with Marlena McCarthy of Ripple Effect and Multiplying Generosity, two best-selling books on using insurance as gifts to charity.)