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Consider donating your life insurance policy

Two ways to donate

By Peter Boys, CAFA The Money Coach

There comes a time for some of us when life insurance is no longer needed. Maybe the children have grown up, debt is all paid or there are no heirs. A common choice is to drop the coverage and take the cash surrender value, but what if there’s a better option? If you need tax relief and want to give back to the community, the answer could be in gifting the policy to a charity at its fair market value (FMV).

When does FMV donation make sense?

When you have a policy that is close to renewal or set to expire or when you or your family no longer need the coverage.

Donating a policy can be an attractive way to realize additional value beyond the useful period of life insurance. Through a gift, you can receive a charitable tax credit that will both minimize personal taxes and support an important cause.

How does it work?

Typically, there are two ways to donate. The most common is to gift a policy by simply assigning the charity as the beneficiary, and upon death, your estate would receive a donation tax credit based on the amount of that gift.

The second method is to change both the policy ownership and beneficiary to the charity. Clients wanting to go this route should consult the charity beforehand to be certain they can accept a gift by this method. When CRA deems that policy donations occur at FMV the benefits are immediate. You receive a charitable tax credit for the policy’s FMV, which is often far greater than the cash surrender value. There are others ways as well but these are the most common.

If you continue to pay the premiums, you will receive additional tax credits for the premiums paid. If not, the premiums can be deducted from the policy’s cash value, or other donors to the charity can pay the premiums. This so that when you die, the charity will receive a death benefit from you that is usually significantly larger than the initial value of the policy and the premium paid.

Tips for donating policies

If you donate a policy at its FMV, you need to make sure that you can use the full donation tax credit. You can only deduct up to 75 per cent of net income each year while you’re alive and you can only carry the credit forward for five years.

You can also donate paid-up policies or convert policies to paid-up before donating them. You can also choose to use an intermediary charity for your donation. The end charity should be involved in the donation of the insurance policy to the intermediary so that the end charity can confirm with you that your money will be going where you want. Also confirm that after the policy matures, the donation will occur on a timeline that everyone is happy with.

If charitable gifting of your life insurance is something you would like to consider, please work with accredited professionals who specialize in this type of giving.