Charitable Giving with Life Insurance


As we approach and enter retirement, planning our legacy becomes more pressing. Philanthropy becomes more important. The biggest gift we can give is our time, with money as a close second. When we’re gone, we can’t give charities our assistance in person but we can still leave them a lot of support through life insurance.

Why Life Insurance?

There are 6 major reasons to use life insurance for charitable giving:

1. Leverage: small insurance premiums buy a large death benefits, especially when you’re younger and healthier

2. Privacy: your donation escapes scrutiny when you bypass your Will and estate by:
a. naming a charity as your beneficiary, or
b. transferring your policy to a charity while alive

3. Flexibility: you can receive tax credits at three different times
a. today: by donating your policy now
b. annually: by paying the future premiums on the donated policy (which the charity will appreciate)
c. at death: to reduce the taxes payable on your estate (or the estate of your surviving spouse since some assets transfer tax-free and are taxed at the second death)

4. Recycling: You can donate life insurance you no longer need instead of cancelling it. You then get a tax credit based on the actuarial Fair Market Value of your policy. This can be higher than the cash surrender value (if any).

5. Proven: Life insurance donations form an important and well-established funding stream for endowments

6. Certainty: You’ll have peace of mind knowing you’ve left a lasting legacy.

Three Ways to Donate

You can use life insurance charitably in three ways, each with their own characteristics:

1. You own the policy and name the charity as the beneficiary: this gives you the most flexibility and control.
You continue making decisions about your coverage. You select the beneficiary and can change your mind. The charity receives the death benefit and provides a tax credit to your estate. You avoid probate fees (called Estate Administration Tax in Ontario) because the beneficiary designation bypasses your estate. However, you don’t get any tax credits for the premiums you pay.

2. You own the policy, name your estate as the beneficiary and give instructions in your Will: ideally you would designate a charity directly.
Donating in this way has no advantages over the previous method. Instead, there are many disadvantages. Since the death benefit forms part of your estate, probate fees apply and creditors can make claims. Estate litigation can reduce the amount the charity ultimately receives. You also lose the privacy associated with a direct beneficiary designation.

3. You donate a new or enforce policy to a charity: this is the ideal method if you’d rather receive an annual stream of tax credits instead of a one-time tax credit for your estate.
When you transfer the policy to the charity and continue paying the premiums, you receive tax credits for the premiums. However, the final death benefit does not give rise to a tax credit since the charity owns the policy. You also lose control over the choice of beneficiary, and the ability to change the policy. You can never regain control of the policy, either.
The actuarial Fair Market Value of your policy at the time of transfer also generates a tax credit. If your preferred charity only accepts fully paid-up policies, you won’t get ongoing tax credits.

In Practice: A Case Study

Here’s a recent case with adjustments made to protect the privacy of the clients. Steve is 67 and his wife Shirley is 65. Both are healthy, retired and regular donors. They have $3 million of assets including their principal residence. They have four independent children between the ages of 25 and 39. When they’ve both died, they want a charity to receive $1,000,000 and have the rest shared equally among their children.

Steve and Shirley discussed their estate plan with their children. The children loved the idea of giving but couldn’t agree on which charity. They asked if they could each be given $250,000 and choose the charity. The parents agreed.

Since Steve and Shirley already have $1,000,000 to donate, they didn’t initially see a need for life insurance. We showed them:

● their donation could be multiplied
● making the beneficiaries revocable allows future changes
● they don’t need to worry about investment returns
● one policy can have multiple beneficiaries and is cheaper than having one policy per charity
They agreed.

What if a child decided against making a donation or decided to delay their donation? Life insurance solved this problem too because the donations would go directly to the chosen charities.

An annual guaranteed premium of $18,948.48 bought $1,000,000 of permanent level cost life insurance (BMO Universal Life, in this case). That’s about 1.9% of the face amount per year. Their maximum outlay is $663,197 if premiums are paid until Shirley is 100. That’s when premiums end but coverage continues.

The tax credits at death allow extra cash to go to their children. Another option was to use the full intended donation of $1,000,000 to buy more life insurance. The family mutually agreed on this second choice.

We structured the insurance so that the full $1,000,000 will be used up in the year Shirley would turn 100. This meant they could invest $28,571 per year in premiums, which buys $1.5M of BMO universal life – a 50% increase from their original donation! The charities win, and most importantly, Steven and Shirley have peace of mind knowing they are leaving a beautiful legacy.

In Conclusion

You can benefit from using life insurance for charitable giving just like Steven and Shirley did, and reap the same rewards. Solutions can be tailored to your unique circumstances and goals.  


Article written by: Promod Sharma

Promod Sharma (“pro-MODE”) is an actuary who developed life & health insurance products and later supported advisors. He now helps people in the Toronto region transfer financial risks with insurance. He’s written 800+ blog posts, recorded 250+ podcasts and published 100+ videos.

He’s a member of the Conference for Advanced Life Underwriting (CALU), a Fellow of the Society of Actuaries (FSA) and a Fellow of the Canadian Institute of Actuaries (FCIA). Promod serves on the board of the Western University Alumni Association. You’ll find more details on LinkedIn. You can find more about him here.

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