Charitable Giving in Canada
How You Can Use Life Insurance for Charitable Giving
If you want to do charitable giving through your estate, life a non-profit organization or for your church, using life insurance in Canada can be done in a very tax efficient way. It must however be done correctly for the donor to receive the appropriate tax relief. There are two processes under which charitable giving with life insurance can be done.
Charitable giving with life insurance currently in force
If you already have life insurance in force, then you can make an absolute assignment to the charity of your choice. The donor will receive a tax receipt for the current cash value and accumulated dividends of the policy. This is treated as a cash donation and the appropriate receipt is issued. If the policy is a paid up policy, there are no further premiums to be paid and the proceeds are paid upon death to your charity or not-for-profit of choice.
If there are ongoing annual premiums to be paid, you can make a tax deductible donation to the charity for the cost of the annual premium. The donation would then be used by the charity to pay the premiums that are still due and the policy will remain in force. Upon your death, the proceeds of the life insurance policy would be paid to the charity that owned the policy.
New life insurance is applied for by you and then assigned to charitable giving
Before you make a commitment to leave a donation to a charity in the form of a life insurance policy, you should make absolutely sure that the insurance is available. It would be rather embarrassing to make a pledge and then find out the insurance was not available (you are declined for insurance due to a medical condition or a hazardous career). This can be done using a standard application to an insurance company for the desired amount of the final donation.
Once insurance is in force, the same assignment as previously explained would take place to the charity. The costs for the insurance can be tax deductible, but money must flow correctly to get the proper tax relief for the donor. The donor must make a commitment to the charity to pay a new monthly or annual donation to the charity in the amount of the premium that the insurance would cost. The donation to the charity would cause a tax receipt to be issued, and then the charity would pay the insurance costs as they came due.
One way to guarantee the premiums would always be available would be to set up a life payout annuity with a much smaller capital investment. The tax treatment of the annuity would be lower than regular investments, leaving a higher cash flow to go towards the premiums. As long as the you live, the annual premium would be guaranteed to be paid via the life annuity.
The best approach would be to use a form of permanent insurance such as Universal Life Insurance, Term 100 Life Insurance, or other Whole Life Insurance. It may be tempting to use an inexpensive term product, but with the exception of Term 100, all other insurance may expire before you do. Certainly charitable giving is something that you would want to be assured would be eventually paid out. It must be clearly understood, that the assignment to the charity must be absolute. The beneficiary will always be the charity and ultimately the premium is payable by the charity. Upon death, the full amount of the proceeds and any excess deposits would be received by the Canada charity.
Canadians are very benevolent by nature and this is an excellent way to fulfill your long term “charity giving” plans. You can contact us at Life Guard Insurance as we are fully versed in charitable giving through life insurance, and get qualified advice before you proceed with any plans.