If you are interested in creating a legacy at your death by making a charitable donation, you may wish to investigate using life insurance for that purpose. There are different ways you can structure life insurance for use in philanthropy. The most common are:
Gifting an Existing Life Insurance Policy
If you currently own a life insurance policy, you can donate that policy to a charity. The charity will become owner and beneficiary of the policy and will issue a charitable receipt for the value of the policy at the time the transfer is made, which is usually the cash surrender value of the existing policy.
There are circumstances, however, where the fair market value may be in excess of cash surrender value. If for example, the donor is uninsurable at the time of the transfer, or if the replacement cost of the policy would be in excess of the current premium, the value of the donation may be higher. Under these conditions, it is advisable for the donor to have a professional valuation of the policy, done by an actuary, prior to the donation.
Any subsequent premium payments made to the policy by the donor after the transfer to the charity will receive a charitable receipt.
Gifting a New Life Insurance Policy
In this situation, a donor would apply for a life insurance policy on his or her life with the charity as owner and beneficiary of the policy at the time of issue. All premiums made by the donor on behalf of the charity would be considered as charitable donations.
Gift of the Life Insurance Death Benefit
With this strategy, an individual would retain ownership of the policy but would name the charity as the beneficiary. Upon the death of the insured, the proceeds would be paid to the charity and the estate of the owner of the policy would receive a charitable receipt for the death benefit proceeds. The naming of the charity can be made at any time prior to death. There is no required minimum period that must be satisfied prior to naming the charity as beneficiary.
As long as the life claim is settled within 3 years of death, the executor of the estate has the option to claim the life insurance donation on:
- The final or terminal return of the insured;
- The prior income tax year's return preceding death of the insured;
- Both the current and prior year tax returns with any excess amount able to carry forward for the next five subsequent years;
- Any combination of the above.
With this strategy, there are no charitable receipts issued while the insured is alive, only after death when the insurance proceeds are paid to the named charity.
Replacing Donated Assets to the Estate
There may be circumstances where a sizeable donation is made to a charity that would greatly reduce the value of the estate that would be left to family or other heirs. For donors who are concerned that their heirs would receive less than originally intended as a result of this donation, purchasing life insurance to replace the donated asset is a possible solution.
The previous headings represent the ways in which life insurance can enhance or complement philanthropy. As well, life insurance can be a valuable addition to a charitable giving program in that it enables the donor to bequeath a larger donation than otherwise would be possible with just hard assets alone.
If you have been or are contemplating making a significant charitable donation, be sure not to overlook how life insurance can enhance your gifting plans.