Charitable Giving With Life Insurance

Three ways to donate your life insurance

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 inforce 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.