Kathy Assayag JCF Executive Director

Each year, millions of Canadians make donations of cash, marketable securities and property to the charities they care about. Many of them are left wishing they could do more. Donating a Life Insurance policy can be an effective way to help your favorite charity achieve its long-term goals. Think of it as a win- win for both you and the charity you choose.

There are various methods of making life insurance donations; each method has unique advantages. These are the ones used most often.

Outright gift of new life insurance policy

As a “Donor”, you would take out a life insurance policy and name the JCF the owner and beneficiary of your policy. Each year you would donate an amount of money to the JCF to pay the premiums and in return, you will receive a donation receipt for the premiums paid. This donation receipt will reduce your tax payable. You leave the JCF instructions on which charity or charities will receive the funds after your lifetime.

Let’s look at an example:
Assume you are a 48-year-old female in good health. You take out a $100,000 policy with charity as owner and beneficiary. Premiums are, say, $3,600 a year for 10 years and qualify for a charitable tax receipt. (cost of the premiums are based on age, gender and health of donor)
You save $1,800 (50% X $3,600) a year in taxes
Result: Cost to you over 10 years is $18,000
Charity receives $100,000, which means, at the end of your life there is $100,000 in your charitable fund that will support your favorite causes.

“Insurance policies can play an important role for donors

to support charities and generate tax savings”

Gift of an existing policy

Many people buy insurance for a specific need and over time, the need changes. For example your need for insurance changes once your children are independent; or you may have needed insurance as a business owner or partner and you have now sold the business.  If the insurance policy is simply cancelled, you as the owner get no benefit for all the premiums that you’ve paid over the years. There is a better more effective alternative of donating the policy to a charity.

An actuary will value the policy based on several factors including age, gender, health, amount of premiums, and how mature the policy is. You will benefit from a donation tax receipt equal to the fair market value of the policy that you can use over 5 calendar years. This can lead to substantial savings. In some cases, the JCF will take over the premiums and the proceeds will go to charitable causes. If you choose to continue to pay the premiums, then again, the cost of the premiums is reduced by 50% because your annual premiums are paid by donation and you get to choose the charities that will ultimately receive the policy death benefit amount.

Let’s look at an example:
Assume you have a $500,000 policy which the actuary has valued at $350,000.
You receive a donation receipt for $350,000 and save $175,000 in taxes in the year of donation, or carry forward for 5 years. The JCF receives $500,000 on your death.

There are two possibilities:
If you continue to donate an amount equal to the premiums (say they are for example $10,000 a year), then as described above, after taking into consideration the donation receipt, the actual cost will only be 50% of the premiums (or $5,000). And in this case, the proceeds will go into your JCF fund to support your favourite charities.
If on the other hand the JCF decides to pay the ongoing premiums, the death benefit will go into the JCF general fund to be used for charitable purposes.  

Corporate owned life insurance

In this situation, your corporation purchases life insurance on the life of a shareholder.

The corporation pays the premiums and receives the insurance proceeds tax -free on the death of shareholder.

The insurance proceeds go into the corporations Capital Dividend Account which can be paid out as a tax-free dividend to the estate of the shareholder. The estate then donates the insurance proceeds to the JCF.

Let’s look at an example:
The corporation purchases a $1,000,000 life insurance policy and pays, say, $25,000 a year in premiums.
Result: The corporation pays premiums for as long as the shareholder lives. These premiums are NOT deductible to the corporation. The Estate receives a donation receipt of $1,000,000 and will use the donation receipt on the deceased’s final return to offset up to $500,000 of taxes, otherwise due on the final return.

“A Leveraged Estate Legacy Arrangement

can provide significant tax savings to the donor”

Leveraged Estate Legacy Arrangement (“LELA”)

A “LELA” is a life insurance strategy designed for charitable giving. It is a combination of a cash rich whole life policy and a bank loan designed to deliver a zero-cost life insurance solution to the donor. At time of death, the bank loan is repaid by the life insurance proceeds and the charity receives its donation. This strategy generates substantial tax savings to the donor at time of death. Individual and corporate donors require a certain level of taxable income to make this strategy work.

Depending on your circumstance, a donation of life insurance may be of great benefit to you, your estate, as well as the charities you wish to support. For donors who wish to leverage their cash donations to charity, they can use life insurance to accomplish this goal. By either gifting a policy outright or naming a charity as beneficiary, donors can provide the charity of their choice with a meaningful gift and provide a lasting legacy to a cause they hold dear to their heart.

As always, we encourage you to seek the advice of your trusted professional advisors to make sure this and other SMART philanthropy tools work for you and your family.

For more information, please contact a Philanthropic Advisor by phone: 514-345-6414; email: [email protected]; website: www.jcfmontreal.org.

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