If your policy has limited use for you, you can maximize its impact by donating to a cause you care about
By James Battiston
Life insurance can be an important part of protecting your family and their future. There are certain instances when you may no longer require your insurance policy. Maybe your dependents have reached an age where they no longer rely on you, or your financial status has grown to a point where a life insurance policy is no longer of great use.
Instead of cancelling your policy outright, you might consider donating your life insurance policy to a charity that is important to you. Not only are you able to receive a tax benefit for your donation, but you can also know that you’re continuing to support a cause that’s important to you.
There are four ways to donate your life insurance benefit to a charity, each of which has specific implications for you, your estate and your taxes.
Charity becomes the owner of a life insurance policy
If you have a term-life policy – that is, a policy that covers you for a certain number of years – that you’re not going to renew, gifting the benefit can optimize the investment you’ve made over the years.
Making the charity the irrevocable owner of your policy has a lot of advantages.
The main one being that you’ll receive a tax receipt to use in the year of the donation. The amount of this receipt is based on the fair market value of your policy which refers to the current value of your policy, taking into account factors like your age and health. This is generally greater than the cash surrender value (CSV), which is the value after a surrender fee is deducted.
If you make a charity the owner of your life insurance policy, they will be responsible for paying any ongoing premiums. If you choose to continue paying the premiums yourself, you can receive a tax receipt for the payments you make.
If you’re unable to claim the entirety of the tax credit in that year, the good news is you can carry it forward for up to five years.
When the policy matures, your chosen charity will receive the full benefit of your policy.
Name a charity as beneficiary
If you want your estate to have the benefit of a charitable tax receipt, naming the charity as the beneficiary in your life insurance policy is the optimal way to go.
In this instance, you will retain the ownership of the policy, and are free to name as many beneficiaries as you want. If the charity you name as a beneficiary isn’t irrevocable, that is they are not permanent, you can always remove them at a later date.
Upon your passing, the charity you have named will receive your policy’s benefit, while your estate will receive a tax receipt for the donation amount.
Take out a new policy in the name of the beneficiary
Another way in which to donate a life insurance policy’s death benefit to a charity is by taking out a new policy and naming the charity as the beneficiary from the start.
In this case you will be responsible for paying the premiums on a year-by-year basis. At the same time, each year you will receive a tax receipt from the charity to use against your income.
Charitable insured annuity
Annuities provide steady streams of income for individuals when they retire. You pay into it in advance, then will receive a designated amount as an income when the annuity period starts.
When you purchase a charitable insured annuity, you use part of the annuity’s income stream to purchase a life insurance policy. This life insurance policy will have the charitable organization as the named beneficiary.
Each year, part of your annuity will pay for the premiums on your life insurance policy. But because the policy has a charity named as a beneficiary, you can receive a tax receipt for the amount of your premiums.
This method gives you the benefit of receiving a steady retirement income and making regular and continued charitable donations.
By gifting your life insurance benefit to a charity, you can help an organization you support to continue to grow and thrive even after you’re gone. Speak to your financial advisor or charity of choice to find out what options are available to you.
Source: Financial Post