It's Your Money  

Donate your life insurance

There comes a time when some people don’t need their permanent life insurance policies any more.

If your children are grown or you have no heirs and you and your spouse are financially secure, you might be considering dropping the policy and taking the cash surrender value (CSV) to use elsewhere.

Before you cancel your policy, it is worth considering gifting the policy to a charity instead. By donating a life insurance policy, you can receive a charitable tax credit for the fair market value (FMV) of the policy and the charity can benefit from the insurance proceeds when you die. 

The FMV of a policy is often far greater than the CSV and depending on your tax situation, the tax credit can sometimes put you in a similar position in the end. The big difference is that you also get to help a worthwhile cause.

The above-mentioned strategy works best when the permanent life policy is already in a “premium offset” position, but what if there are still premiums to be paid?

Some donors will commit to continuing to pay the premiums and these additional payments will result in additional donations and subsequent tax credits.

In other cases, there may be sufficient cash values in the policy to make the necessary premium payments for future years. 

Another option to consider is leaving the policy ownership in your name, but naming the charity of your choice as the beneficiary.

This won’t provide any immediate tax relief, but will result in your estate receiving a donation credit for the full face amount of the policy when you pass on.

For those facing significant estate taxes, this alternate strategy is worth considering.

A term life insurance policy that is close to renewal may also be prime for donation, but only if the current owner or another donor of the charity is willing to commit to continuing the premium payments.

In some cases, a term policy that is being cancelled is a wasted opportunity for providing a charity with some much-needed funding. 

Gifting an insurance policy might also be an excellent idea for corporately owned insurance, particularly a policy that has significant CSV and a large tax liability if it was transferred out of the corp.

We often see policies “trapped” inside corporations that are needing to be wound up and donating the policy might be a viable way out with an attractive tax credit. 

To make this all work, you need to communicate in advance with the charity of your choice to confirm their support. You will also need to work with the insurance company to confirm the FMV of the policy. 

A qualified financial planning professional can help you evaluate the different options and see what might make the most sense for you. Before you cash in your policy, take the time to evaluate the idea of giving it as a gift instead.         


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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