Charitable Gifts of Life Insurance: Give more for less

I routinely come across people who make regular monthly or annual contributions to various charities. They are often surprised to learn that there is a way to dramatically increase the amount of their charitable contributions to their favourite charities without costing them a dime more out their own pockets. This can be achieved through the gifting of life insurance policies.

Here’s How It Works

WomanLookingAtPiggy.JPGNormally you would purchase a bare-bones permanent life insurance policy such as Term-to-100 – this allows for a set monthly (or annual) payment from now until the time you turn 100 years of age (if you make it that long!). The payment never fluctuates. The death benefit is known at the time of application, and that too never fluctuates.

The next step is to designate a charitable organization as the IRREVOCABLE beneficiary, and further to assign ownership of the policy itself to the charitable organization. You would continue to pay the premiums, but now the premiums are treated as charitable contributions which means they are eligible for the non-refundable charitable donation tax credit.

Example 

To give you a real-life example I recently provided a quote for a couple who were both 40, and they were donating $30/month to a local charity. If they both lived to 100 years of age, they would have contributed a total of $21,600 to this charity and they would have saved an additional $8,000 and change if they delayed claiming their charitable donations to once every 5 years to maximize their tax savings. Their total out of pocket cost to give $21,600 to this charity over 60 years would be roughly $13,600.

If they had instead gone with a charitable life insurance solution of roughly the same cost we found that $31.60/month would provide a $100,000 death benefit on a joint-last-to-die basis for them based on a term-to-100 policy. This means the policy would pay $100,000 to their charity once both of them had passed. They would have the same tax savings as before (well, *slightly* higher, but the cost is *slightly* higher as well) and the benefit to the charity has increased dramatically.

The one draw back for the charity is that they will have to wait for potentially a very long time before getting access to these funds as opposed to getting ongoing support right now. This might not appeal to some donors. On the other hand, if you die before then you will have made a substantial gift relatively soon.

Notes

By assigning the charity as the owner, they now have the ability to know if you decide to stop making premium payments (can’t afford it or what have you). This means that the charity will receive the notice indicating payment is due to continue enforcing the policy should payments lapse. Normally the charity will continue to pay the policy premiums if the policy has been in place for some time because from their point of view the rate of return on their money will be very high from that point forward.

Alternatively, you can name your estate as beneficiary of the policy and make an equal bequest in your will to the charity. You will not generate any tax savings during your lifetime, but your estate will have a significantly higher dollar amount eligible for the charitable tax credit on your terminal return equal to the amount of the gift. 

If you are interested in these strategies, you can get an online quote from kannetix (not a sponsored link) or talk to your insurance advisor. Also be sure to consult with a qualified advisor if you have any questions. Make sure your charity is an approved and registered charity that is eligible for the charitable donation credit, too! :)

Finally, note that there are other ways to give to charity and I will explore them as well in future posts. 

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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