DISCLAIMER: We hope you find this material useful in learning about giving. However, you should never use this material without first reviewing it with your own lawyer(s) and tax advisor(s) to determine its suitability for your circumstances. This material does not constitute legal, tax, or other professional advice.
Do you tend to give to charity when asked? If so, do you sometimes get the feeling your charitable endeavours could be more purposeful?
Adopting a proactive approach to giving can help to assess not only what charities you want to support but also how you want to give. For example, whether you have a highly customized or more basic life insurance plan, you can give this valuable asset to make a difference.
There are a few different ways to go about gifting a life insurance policy to a charity. You can work with your life insurance advisor, or you can give through a donor-advised fund.
What is a donor-advised fund (DAF)?
A donor-advised fund (DAF), like Charitable Impact, is a giving vehicle gaining traction across North America. When you give, you access an immediate tax receipt. Your charitable assets are distributed to qualified donees upon your advice — allowing you the time and space to make personally meaningful charitable decisions.
With a DAF, you can give non-cash assets, such as securities, real estate, and art, to charity. You can also give cash assets, such as a life insurance policy.
“When it fits into your financial goals, giving life insurance through a donor-advised fund can be a cost-effective and strategic way of supporting the causes you care about,” says Robert Bancroft, Director, Charitable Investment Programs. “This charitable option has an impact that extends beyond your life.”
Reasons for giving life insurance to charity
Giving life insurance can be a budget-conscious way of practising philanthropy. When you make regular payments toward a policy dedicated to charity, you do so knowing your future payout will make a significant impact.
"Giving life insurance is something that people don't often think about, but it can have a massive impact on a [charity],” says Danielle (Allan) Kanengoni, vice president and insurance advisor at Allan Financial. “It may not be something you see in your lifetime, but your impact is going to be a huge multiple of what you contribute.”
You might consider donating life insurance when you have assets that have significantly increased in value, such as a home you purchased and paid off decades ago. You may decide your life insurance policy can be set aside for charity while still passing wealth on to your family and loved ones.
Of course, donating life insurance should be secondary to covering your own needs and the needs of your family. Starting a policy when you’re young can be more affordable and provide more charitable opportunities later in life. When you feel secure in your financial position, giving life insurance becomes an excellent option.
How to donate a life insurance policy to charity
There are three main ways to give life insurance:
Name a charity or DAF as a beneficiary in an existing policy: You keep ownership of the policy, and the death benefits are passed along to charity, while a charitable tax receipt is applied to your estate.
Create a new policy to donate to a charity or DAF: The charity or DAF becomes the owner of the policy and the monthly premiums paid by the donor are receiptable toward a charitable tax credit. At the time of your death, the value of the policy will transfer to that charity. There would be no additional tax receipts at the time of the transfer.
Transfer an existing policy to a charity or DAF: When you give an existing policy, some (if not all) of the premiums are likely already paid in full. You receive an immediate tax benefit for the value of the policy and any future premiums paid by the donor are receiptable toward a charitable tax credit. There would be no additional tax receipts at the time of death.
If you’re considering donating your existing policy or purchasing a new one, it’s a smart idea to speak with a financial advisor. Not only can they advise on the best approach to giving life insurance based on your budget and strategic giving plan; they can also explain the difference between the impact of giving monthly versus contributing to a life insurance policy to be donated later, and help you name a DAF as a beneficiary or open a new policy.
When donating, you can make regular, smaller monthly payments as premiums or donate a still-in-force plan paid in full with no remaining premiums. Both options have different tax consequences and financial considerations to explore.
Benefits and considerations of donating life insurance through a DAF
There are several options for how your life insurance payout at death can be passed along to charity through a DAF: 1) allocating to the charity or charities you had last indicated, 2) passing the value on to your heirs, or 3) distributing charitable dollars as gifts. The latter is like an endowed charitable allowance that can help others fulfill their own giving plans and visions or give the money away in your honour.
But how will you know exactly how you want your charitable assets spent at the end of life?
With a DAF, you can donate a life insurance policy to charity without having to know how you would like to allocate your assets or which registered charities you would like to support. You have the flexibility to change your mind about where you would like to donate.
As a donor, you may know you want to give to a small charity that has few resources for processing non-cash assets or major gifts. A DAF can accept such donations, and send gifts to any qualified donee, which includes all registered charities.
Giving with intention and thoughtfulness can make the experience more meaningful. A DAF can provide philanthropic advisory services to create a strategic giving plan and help determine if life insurance is a charitable asset that suits your needs, intentions, and interests as a donor.
Tax credits available to you after donating life insurance
When you donate life insurance, it’s not subject to taxes. You can also access charitable tax credits. A payout would only be taxable if it was applied to your estate.
If a donor makes a charity the owner and beneficiary of a life insurance policy, they will receive an immediate tax receipt. In this case, there’s no tax benefit at death. If a donor allocates a portion of their death benefit to charity and retains ownership of the policy, then they have no tax benefit at the time of donation. The tax receipt would be applied to their estate upon their passing.
If you open a new policy or transfer an existing one, you will likely be financially responsible for paying premiums for the payout value to reach charity. There is an obligation to pay premiums for the policy to stay in force until it is “paid up.” In some cases, a charity can take over these payments but more often the responsibility lies with the donor.
How to know if donating life insurance to charity is right for you
Giving life insurance only contributes to a cause after you pass. If you are looking for more engagement with specific charities during your lifetime, you may want to devote resources to giving as part of your day-to-day budget.
Giving life insurance can be particularly useful, however, for donors who know they want to contribute a significant sum at death, who may be interested in specific tax benefits, or both.
Creating your own strategic plan can be a step toward a charitable vision beyond what you previously thought was possible. Giving through a DAF can be a way to get started, especially if you don’t know where you want to direct your charitable assets at end of life.
We’re grateful to our friends at Charitable Impact for lending their expertise on donating life insurance to charity via a donor-advised fund to the LowestRates.ca audience. ￼Charitable Impact is a public foundation that operates as a donor-advised fund, enabling donors to manage their charitable giving from a single account called an Impact Account.