There are two types of gifts of life insurance: 1) The ownership of the life insurance policy is irrevocably transferred to the Organization, or 2) The organization is named as registered beneficiary to receive proceeds of the policy, but is not the owner.
1. Life insurance ownership is irrevocably transferred
When full ownership of the life insurance policy is irrevocably transferred to the organization and the organization is also made the designated beneficiary of the policy, you receive an immediate donation receipt for the cash value of the donated policy if the organization is a registered charity. You will also receive annual donation receipts for any premiums that you pay after the transfer to keep the policy in force.
Benefits to you?
- As a donor making premium payments, you need only make small current outlays that will be leveraged into a much larger future gift.
- If the transferred policy has been fully paid, you make no further capital outlays yet there will be a large future gift.
- As the organization is the owner and beneficiary of the policy, the insurance proceeds at death will be paid directly to the organization. They are not included in your estate and are not subject to estate probate fees.
Who can give gifts of life insurance?
Insurance gifts generally appeal to people who have an older policy that is no longer needed, or who want to make a large gift but have limited resources.
How can I give a life insurance gift?
Your insurer provides papers for you to sign, transferring ownership of the policy to the organization and also making the organization the registered beneficiary of the policy.
Please check with the organization beforehand regarding its gift acceptance policies and procedures regarding life insurance. Please seek financial planning/tax advice before finalizing this type of gift.
In order to qualify for a donation receipt, you must transfer ownership irrevocably to the organization. You cannot get the policy back if you suffer a financial reversal in the future.
After a period of time, some donors may tire of making yearly premium payments, even though they receive annual tax receipts for the premiums. Fully paid policies or policies where premium payments are no longer required after a clearly defined and relatively short period of time (for example, five years) are advantageous in this regard. For some donors, a one-time lump sum payment may be possible.
If a donor stops paying premiums before the policy is fully paid, there are three options. The organization can:
- continue paying the premiums with its own funds,
- surrender the policy for its cash value, or
- if there is sufficient cash value, convert the existing policy to a paid-up policy for less than the face amount.
2. Gifts of Life Insurance Proceeds (Organization Named as Registered Beneficiary)
You may retain ownership of your policy and name the organization as beneficiary of personal or group life insurance. Upon death, the insurance company will pay the death proceeds directly to the organization. The organization, if it is a registered charity, will issue a tax receipt to your estate for the policy proceeds. Note that you will not receive donation receipts while alive.
Benefits to you?
- As donor you receive the satisfaction of providing for a significant future gift while retaining full ownership (and thus control) of the policy.
- Modest premium payments translate into a much larger future gift. This is excellent leverage!
- Upon death, the insurance proceeds will be paid directly to the organization. This occurs outside your estate. The proceeds are therefore not subject to probate fees.
- Upon receipt of the insurance proceeds, the organization will issue a donation receipt for the proceeds to your estate. The donation receipt may be used by your estate to offset taxes payable upon death.
Planned gifts can provide beneficial results for a donor but, in order to ensure that all relevant issues have been considered and addressed and that all Income Tax Act, Canada provisions and regulations are met, prospective donors should seek qualified legal and accounting advice.
Give Green Canada acknowledges and thanks Lorna Somers and Frank Minton for pre-approving the use of their book Planned Giving for Canadians as the basis for the information provided about different types of gifts.