Using Life Insurance For Charitable Giving

It’s natural that if we’re successful, we want to give something back to the less fortunate and help them. Not many people know, but life insurance plans provide a way in which you can make larger gifts than you might though possible. In this article, you’ll learn about some of the different ways you can benefit your favourite charity and minimize your tax burden using life insurance as a charitable gift. Here are a few good ideas:

  • Designate the charity as beneficiary on a new or existing policy.The estate of the insured will receive a charitable tax receipt for the face amount of the policy. The charity receives a substantial donation and the tax deduction can be applied by the estate in the year of death, and carried back to the preceding year.
  • Transfer a new or existing policy to the charity with a pledge to pay the premiums each year. You receive a charitable tax receipt for the amount of the premiums paid each year. No receipt is issued for the proceeds of the life insurance on the death of the insured.
  • Buy a life insurance policy equivalent to the value of your RRIF or RRSP, and designate the charity as beneficiary of the RRIF or RRSP. On your death, the charity issues a charitable tax receipt which offsets the tax impact of the RRIF proceeds.
  • Wealth Replacement Insurance. This is a creative option which allows you to donate a large asset or lump sum of money to charity. In return, you receive a charitable credit for the donation which results in tax savings for the year the donation is made. You can then invest these tax savings in an insurance policy that potentially results in enough proceeds to replace the value of the gifted property.

    Let’s look at an example of the last method.

    Mrs. Jones own a piece of land that originally cost her $100,000. It is now worth $300,000. She donates the land to charity and receives a donation receipt for $300,000, which will equate to tax savings of approximately $138,000 (assuming a 46% marginal tax rate).

    Mrs. Jones incurs a taxable capital gain on the disposition of the land of $100,000 (50% of $300,000-$100,000) resulting in tax payable of $46,000. However, the net tax savings of $92,000 could be used to fund a life insurance policy on Mrs. Jones producing a potential tax free death benefit for her heirs in excess of her original donation.

Many people are unaware of the increased contribution they can make to charities by using more creative methods of giving. Careful planning can result in larger amounts being available to meet your philanthropic goals and help others in need.