Charities and Life Insurance

Introduction

In this Tax Topic, we look at the basic rules relating to charitable giving through life insurance and in particular, the methods of gifting life insurance.

There are three main methods by which a donor can gift life insurance to a charity. First, the donor can make a bequest of the proceeds of a life insurance policy through his or her Will. Second, the donor can donate the policy during his or her lifetime. Third, the charity may be named as beneficiary under a policy owned by the donor.

Bequest of policy proceeds

An individual can make a donation of life insurance proceeds through his or her Will. The individual owns the policy during his or her lifetime and the individual’s estate will be the beneficiary of the policy. The individual’s Will would indicate that a gift of an amount equal to the life insurance proceeds will be paid to a charity named in the Will. The charity will receive the lump sum amount equal to the insurance proceeds on the death of the insured.

The donor will not receive a tax credit for the premiums paid during his or her lifetime, but a tax credit will be available in the year of death, with a one-year carryback. The donation limit for gifts in the year of death and the preceding year is 100% of net income.
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Where a gift of proceeds is made under an individual’s Will, the insurance proceeds pass through the estate of the individual. Accordingly, the funds may be subject to probate fees and creditor claims as well as estate litigation. Donor confidentiality may not be protected. However, the donor does retain absolute control of the policy throughout his or her life.

With this type of charitable gift, the charity is at risk since the Will can be changed to eliminate the charity as a recipient of the insurance proceeds. Claims against the donor’s estate can reduce the funds which were originally intended for the charity.

Charity owned policy

A charity can acquire a life insurance policy under which the donor is the life insured and the charity is the beneficiary. Since the charity does not have an insurable interest in the donor, the charity must obtain the donor’s consent when applying for the policy; this is usually a minor formality. Alternatively, the charity can become the owner and beneficiary of a policy that is already owned by the donor. The donor will be the life insured and the original beneficiary of the policy.