Gifts of Life Insurance
Life insurance is the one asset almost everyone has. For the young parent with limited dollars, it is a way to protect the family against economic loss in the event of a parent's premature death. For the business owner, it may provide dollars to buy out a deceased partner's interest or compensate for the loss of a key manager. For older individuals, it provides the liquidity needed to settle an estate and pay taxes.
Life insurance has another important use: it is a popular and practical way to make a significant gift to charity.
Acceptable Assets:
- Any whole life policy (participating or universal)
- Many term policies (personal)
- Many group insurance policies (personal)
Benefits to the Thunder Bay & District Humane Society:
- Immediate access to existing cash value, when policy ownership vests with the Humane Society
- Assurance of death proceeds if policy is owned by the Humane Society and is retained (Term and group insurance policies are often not retained as donors get older)
- Effective tool for building long-term endowment
- Under February 2004 Budget provisions, policy proceeds exempt from disbursement quota if endowed
Benefits to the Donor:
- Donation receipt for cash value and any future premiums paid on transfer of policy ownership
- Small current outlay leveraged into larger future gift
- If policy ownership rights retained during lifetime, no donation receipt for premiums paid, but donation receipt to estate for full value of death proceeds
- Satisfaction of providing a future gift while retaining full control of policy (in cases where donor retains ownership rights of the policy)
Most Appropriate for:
- Persons (generally ages 30-60) who have an older policy no longer needed, or want to make a large gift but have limited resources
- Persons (any age) whose personal needs and family situation may be subject to change
- Professionals with good cash flow, but limited capital assets.
Common Questions & Answers:
Q: What are the ways to give life insurance?
A donor can retain ownership of the policy and designate the Thunder Bay & District Humane Society to receive all or a fraction of the death proceeds, or the ownership of the policy can be transferred to the Humane Society by the donor, relinquishing all of the associated rights.
Q: How does a donor make the death proceeds payable to the Thunder Bay & District Humane Society?
The simplest - and the preferred - way would be to name the Humane Society as the beneficiary of the policy. The Humane Society would then receive the proceeds at death. Another way would be to make the estate the beneficiary of the proceeds and add a bequest in the will providing an equivalent amount for the Humane Society. The disadvantage of this alternative is that the proceeds would be subject to probate.
While neither method yields any tax credit during a donor's lifetime, they both enable the estate to claim a credit on the final tax return after the donor's death.
For example, Mr. Smith makes the $50,000 proceeds of his policy payable to the Thunder Bay & District Humane Society. When he dies, his estate will receive a donation receipt for $50,000, which may result in a substantial tax credit on his final return.
Q: Can a life insurance gift reduce current income taxes?
Yes, if a donor transfers ownership of the policy to the Humane Society. A donation receipt will be issued for the cash value of the policy, which is creditable on the donor's current year's return. If the donation receipt exceeds 75 percent of current net income, the excess may be carried forward up to five years. If premiums are still owing and the donor continues to pay them, donation receipts will be issued for those payments as well.
For example, Ms. Lawson gives a paid-up policy with a $100,000 face value and a $40,000 cash value. Her donation receipt is for $40,000, which results in tax credit of $18,000 (assuming a combined tax credit of 45 percent).
Q: What if a donor doesn't have an old policy to give?
A donor can take out a new policy in the name of the Humane Society and spread the payments over a period of years. At the donor's death, the Humane Society will receive the full face amount of the policy. Meanwhile, donation receipts will be issued for the premiums paid, thus reducing the actual cost of the gift.
Mr. Michaels, age 45, makes his gift through a $50,000 "five-year-pay" policy. For five years he pays annual premiums of $1,962. Assuming a combined tax credit of 45 percent, he realizes a tax saving of $883 each year, reducing his out-of-pocket annual cost to $1,079. Thus, for a net cost of only $5,395 (5 x $1,079), Mr. Michaels provides the Thunder Bay & District Humane Society with a future gift of $50,000.
Q: Are there other ways to use insurance in charitable giving?
An insurance policy is a good way to provide "wealth replacement" when you donate an asset you might otherwise wish to leave to your heirs.
At age 60, Ms. Lee contributes $100,000 to the Thunder Bay & District Humane Society and realizes tax savings of $45,000 over the period she claims the donation receipt. She uses $22,000 of the tax savings to purchase a paid up $100,000 policy. At her death it will go to her children, replacing the amount she gave to charity. Meanwhile, she still saves $23,000 in taxes through her gift.