If people want to give to a charity or church using life insurance in Canada, it can be done as a tax deductible process. It must however be done correctly for the donor to receive the appropriate tax relief. There are two processes under which it can be done and I will deal with them separately.
Life insurance is currently in force.
If someone already has life insurance in force, they can make an absolute assignment to the charity of their choice. The donor will receive a tax receipt for the current cash value and accumulated dividends of the policy. This is treated as a cash donation and the appropriate receipt is issued. If the policy is a paid up policy, there are no further promotions to be paid and the proceedings are paid up the death of the donor.
If there are ongoing annual bonuses to be paid, the donor can make a tax deductible donation to the charity for the cost of the annual premium. The donation would then be used by the charity to pay the premiums that are still due and the policy will remain in force. Upon the death of the insured person, the proceedings of the life insurance policy would have paid to the charity that owned the policy.
New life insurance is applied for by the donor and then assigned to the charity.
Before someone makes a commitment to leave a donation to a charity in the form of a life insurance policy, they should make absolutely sure that the insurance is available. It would be rather embarrassing to make a pledge and then find out the insurance was not available. This can be done using a standard application to an insurance company for the desired amount of the final donation.
Once insurance is in force, the same assignment as previously explained would take place to the charity. The costs for the insurance can be tax deductible, but money must flow correctly to get the proper tax relief for the donor. The donor must make a commitment to the charity to pay a new monthly or annual donation to the charity in the amount of the premium that the insurance would cost. The donation to the charity would cause a tax receipt to be issued, and then the charity would pay the insurance costs as they became due.
The probable best approach would be to use a Universal Life product, a term to 100, or other whole life product. It may be tempting to use an inexpensive term product, but with the exception of term 100, all other insurance may expire before the donor does. Certainly a charitable gift is something that a donor would want to be assured would be promptly paid. It must be clearly understood, that the assignment to the charity must be absolute. The beneficiary will always be the charity and absolutely the premium is payable by the charity. Upon death, the full amount of the proceeds and any excess deposits would have been received by the charity.
Canadians are very benevolent by nature and this is an excellent way to fulfill any long term "charity giving" plans. Make sure you contact a qualified life insurance broker who is fully versed in this type of arrangement before you proceed with any programs of this nature.
Author: John Kovats, CLU – The Benefit Guys – April 2010