Enhancing your charitable donation through single-premium life insurance.
Life insurance is just one of the various ways Canadians can donate to charitable organizations and receive a donation tax credit. This is accomplished by the donor making the desired charity the owner of the donor’s new or existing life insurance policy. One unique way life insurance can be donated to a charity is through a Single Premium Permanent Life Insurance policy. In this article, we will first briefly explain the idea of donating permanent life insurance, then look at the unique benefits donating single-premium permanent life insurance offers.
What is Single Premium Permanent Life Insurance?
Conventionally, once life insurance has been purchased, premiums are paid monthly or annually for a specified period of time. Single-premium permanent life insurance is a type of permanent life insurance policy that is fully paid-up with a single, often substantial premium payment. No further premium payments should ever be required. The policy remains in effect until the insured individual passes away, at which time the death benefit is paid out to the beneficiary or beneficiaries.
A policyholder can designate a charitable organization as the beneficiary of the policy. This allows the donor to make a significant future gift to the charity while receiving a tax benefit annually, based on the premiums made. When the insured individual dies, the charity receives the death benefit, tax free.
What are the Benefits of Donating Permanent Life Insurance?
Donating life insurance provides advantages for the donor and receiving charity. Once the charity has been made the owner and the beneficiary of the policy, the donor can continue paying the insurance premiums and receive an annual charitable donation tax credit. Another option for the donor is to make the donation on death and receiving the tax credit then.
Charities who are looking to secure donations for the future can benefit from their donors donating permanent life insurance policies. Permanent life insurance provides a guaranteed death benefit, and certain types of permanent life insurance have death benefits that grow over time. Life insurance policies with cash value also provide the charity to access funds from the insurance policy before the donor passes away.
What are the Disadvantages of Donating Permanent Life Insurance?
Once a donor donates their life insurance policy to a charity, they have lost control over the policy. Regaining ownership of the policy in the future is not possible. The donor should have a life insurance advisor or financial planner do an insurance needs analysis before donating a policy.
For charities, one major disadvantage of having a life insurance policy donated is that the donor can choose to stop paying premiums at any time. If the charity cannot continue premium payments, they would be forced to surrender the policy.
How Does Single-Premium Permanent Life Insurance Address Some of the Disadvantages?
When single-premium permanent life insurance is donated to charities, donors receive the donation tax credit upon paying the first premium. Charities and donors do not need to worry about making future premiums. The charity is now fully in control of a policy that is paid up. Certain permanent life insurance policies could see the death benefit and cash value potentially grow every year.
Example of Donating Single-Premium Permanent Life Insurance
Carla is 54 and in good health. She typically makes a $50,000 donation to her local hospital foundation every year. This year, she learns she can donate a single-premium cash-value permanent life insurance policy. Instead of donating the $50,000 directly to the hospital foundation, she uses it to buy a single-pay permanent life insurance policy with a minimum guaranteed face value of $68,900 today. The policy is owned by the hospital foundation, Carla still receives her typical donation tax credit based on a $50,000 donation and never has to worry about making insurance premium payments again. The foundation has complete control over the policy and does not need to worry about Carla failing to make future premiums or changing the beneficiary. When Carla reaches 90 years old, the death benefit is now $237,000, based on current rates. This is not guaranteed and is for illustration purposes only.
Life insurance can provide a unique way for individuals to make sizeable donations. Donating single-premium permanent life insurance can provide benefits for both the donor and the recipient.
This information has been prepared by Mehul Gandhi, CFP®️, CLU®️, TEP who is an Estate Planning Specialist and Senior Insurance Advisor for Westmount Wealth Planning Inc. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
