As a member of the Canadian Association of Gift Planners (CAGP) I spend a great deal of time working with charities and donors. The primary focus of CAGP is to help educate the donor population on the importance of creating legacy gifts as part of their planning. A legacy gift or bequest is a gift that is typically made as part of the estate verses writing a cheque today to your favorite charity's capital campaign.
A strategy that is becoming more popular as a result of some changes within the CRA is the concept of gifting an existing life insurance policy to your charity. The concept of gifting an insurance policy is certainly not new, but what is new is how it can be treated from a tax perspective. In a nut shell, a person might own an insurance policy from years ago that perhaps he/she has no real need for today. The policy could have been purchased as part of some risk protection years ago, and circumstances have changed such that it is no longer needed or perhaps a bank had asked for some insurance as part of a credit application, or perhaps it was insurance purchased as part of some business or estate planning that had been done. In any case, the policy is no longer needed for its intended purpose. Gifting such a policy to a charity can generate a significant tax credit now.
I have attached a very basic one page sample of how a policy can be valued for purposes of a gift and how the tax credit works for the donor today. In the example, a 65 year old male has a $1,000,000 policy (Term 100) that he no longer needs for the intended purpose. He has been paying $2,500 per year for this policy as he purchased it many years ago when he was in his early 40's. For this person to purchase a new $1,000,000 term policy today, given his current age and because the cost of insurance for this type of plan has increased 30 or 40% over the past few years, it would cost around $28,000 per year. This gentlemen was very philanthropic and was interested in making a gift to his favorite charity. The idea of giving this $1,000,000 policy to them seemed attractive since he did not need or want it anymore. For this gift to occur, an actuarial valuation needed to be done. It was determined by the actuaries that the value of his gift was around $450,000, so in the year he made this gift he received a $450,000 tax credit. The charity now has this $1,000,000 policy and on his death will receive the $1,000,000 gift.
If you are reviewing your life insurance portfolio and you determine that perhaps some of your insurance is no longer needed or wanted, consider how a gift to your charity can really help them and of course provide you with a nice tax credit today while you are around to enjoy it, verses leaving it in your estate plan.