There are many different approaches that can be implemented using life insurance.
The following article was written by Rick Goldring, a member of our Gift Planning Services Committee:
Canadians are charitable people. Approximately 85% of those of us age 15 and over donate to charities and non-profits each year. Most do this by cheque, cash or credit card.
A much better way to donate is using appreciated securities (Eg. Stocks, Mutual Funds, ETFs, etc.). Normally, the growth (capital gains) would be taxed at 27%. However, by donating these assets to charity you pay no tax on the capital gains and receive a charitable receipt for the full market value that will usually save you $1 of tax for every $2 you donate.
Often the most tax-effective way to be generous in Canada is by using life insurance. Life insurance will produce a much bigger gift that can be more beneficial to you and the charity. Here is an example. Let us assume you give $10,000 a year to your favourite charity and receive a charitable donation receipt for your income tax return. Another option, instead of writing that $10,000 cheque every year, is to pay the premiums on a life insurance policy, which you transfer to the charity. The payout on the life insurance policy will be many multiples more than the aggregate of that $10,000 gift a year and you still receive a charitable receipt for your premiums. Alternatively, you can pay the $10,000 premium (you would not receive a charitable receipt) and designate the charity as the beneficiary of the policy. The charity will receive a generous gift on your death and your estate will receive a big charitable tax receipt which can be used to offset taxes owing in your estate tax return.
There are many different approaches that can be implemented using life insurance. A donor can make annual donations using permanent cash-value life insurance and the charity can begin to receive a cash flow from the policy while the donor is alive! Money can be paid to the charity as early as in the first year the donation is made. If the charity owns the policy, the dividend paid to the charity each year is received tax free.
This person wants to leave a planned legacy gift upon her passing to her favourite charity. She donates $10,000 per year for ten years to the charity with the after- tax annual cost equalling $5,000. The donation each year is used to pay a premium each year for ten years, creating a $128,000 life insurance benefit in the first year. Each year the death benefit grows and in year ten, the death benefit is over $170,000. After 10 years, one option to consider is for the charity to start receiving dividends from the policy each year for the rest of life of this person. In year 11, the dividend would be around $3,000 per year and would continue to increase to over $5,000 per year at age 90.
$10,000 per year for ten years is required to pay for the life insurance that is owned by the charity. The after-tax cost for the policy is $5,000 per year or $50,000 net to the donor over the ten-year period.
Assuming this person passes away at age 90, the benefit payable tax free to the charity is around $170,000.
In addition, the charity and donor agreed to have the annual dividends starting in year eleven, paid each year to the charity. The average dividend per year for thirty years would be around $4,300 resulting in the charity receiving $130,000 over thirty years from age 60-90.
The donor cost of $50,000 after tax creates over $300,000 for the charity.
Or, if the charity did not receive any dividends while this donor is alive and this person passed on at age 90, the charity would receive in the range of $500,000 as the result of a $50,000 after tax gift.
Life insurance creates a multiplier effect resulting in significant benefits for the charity and the donor.
This strategy can be implemented on people who are younger than fifty as well as those older, all the way up to age 80.
Most people know what life insurance is, but do not know what it does.
Here is just one example of how life insurance can create a meaningful legacy for your favourite charity.
