Donating to Charity Using Life Insurance
If you are interested in creating a legacy at your death by making a charitable donation, you may wish to investigate using life insurance for that purpose. There are different ways you can structure life insurance for use in philanthropy. The most common are:
Gifting an Existing Life Insurance Policy
If you currently own a life insurance policy, you can donate that policy to a charity. The charity will become owner and beneficiary of the policy and will issue a charitable receipt for the value of the policy at the time the transfer is made, which is usually the cash surrender value of the existing policy.
There are circumstances, however, where the fair market value may be in excess of cash surrender value. If for example, the donor is uninsurable at the time of the transfer, or if the replacement cost of the policy would be in excess of the current premium, the value of the donation may be higher. Under these conditions, it is advisable for the donor to have a professional valuation of the policy, done by an actuary, prior to the donation.
Any subsequent premium payments made to the policy by the donor after the transfer to the charity will receive a charitable receipt.
Gifting a New Life Insurance Policy
In this situation, a donor would apply for a life insurance policy on his or her life with the charity as owner and beneficiary of the policy at the time of issue. All premiums made by the donor on behalf of the charity would be considered as charitable donations.
Gift of the Life Insurance Death Benefit
With this strategy, an individual would retain ownership of the policy but would name the charity as the beneficiary. Upon the death of the insured, the proceeds would be paid to the charity and the estate of the owner of the policy would receive a charitable receipt for the death benefit proceeds. The naming of the charity can be made at any time prior to death. There is no required minimum period that must be satisfied prior to naming the charity as beneficiary.
As long as the life claim is settled within 3 years of death, the executor of the estate has the option to claim the life insurance donation on:
-
The final or terminal return of the insured;
-
The prior income tax year’s return preceding death of the insured;
-
Both the current and prior year tax returns with any excess amount able to carry forward for the next five subsequent years;
-
Any combination of the above.
With this strategy, there are no charitable receipts issued while the insured is alive, only after death when the insurance proceeds are paid to the named charity.
Replacing Donated Assets to the Estate
There may be circumstances where a sizeable donation is made to a charity that would greatly reduce the value of the estate that would be left to family or other heirs. For donors who are concerned that their heirs would receive less than originally intended as a result of this donation, purchasing life insurance to replace the donated asset is a possible solution.
The previous headings represent the ways in which life insurance can enhance or complement philanthropy. As well, life insurance can be a valuable addition to a charitable giving program in that it enables the donor to bequeath a larger donation than otherwise would be possible with just hard assets alone.
If you have been or are contemplating making a significant charitable donation, be sure not to overlook how life insurance can enhance your gifting plans.
What the Wealthy Know about Life Insurance
If you have ever thought that life insurance was something you wouldn’t need after you reached a certain level of financial security, you might be interested in knowing why many wealthy individuals still carry large amounts of insurance. Consider the following:
-
A life insurance advisor in California recently placed a $201 million dollar life insurance policy on the life of a tech industry billionaire;
-
Well-known music executive David Geffen was life insured for $100 million;
-
Malcolm Forbes, owner of Forbes Magazine, was insured at the time of his death in 1990 for $70 million.
While life insurance is most often looked upon as a vehicle to protect one’s family or business, the question that springs to mind is why individuals with wealth need life insurance?
The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death. In addition, they often have a strong desire to make a substantial donation to a favourite charity or educational institution.
“Life insurance is an efficient way to transfer money to your heirs.” – Malcolm Forbes
In Canada, individuals are deemed to have disposed of all their assets at fair market value when they die, which often results in taxable capital gains and other deferred taxes coming due. Paying premiums for insurance that will cover these taxes is almost always less expensive and more efficient than converting assets.
When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax.
Fully Tax Exposed
Investments which are taxed at the highest rate of income tax:
-
Interest-bearing instruments such as bonds, savings accounts and guaranteed investment certificates;
-
Rents;
-
Withdrawals or income from registered plans such as RSP’s or RPP’s.
Tax-Advantaged
Investments which are taxed at lower rates of income tax:
-
Investments which are taxed as a capital gain;
-
Dividends;
-
Flow through share programs;
-
Prescribed annuity income.
-
Tax-Deferred
Investments on which income tax is deferred until the asset is disposed of or the investor dies:
-
Registered Savings Plans;
-
Individual and Registered Pension Plans;
-
Investments producing deferred capital gains.
Registered plans, in addition to having the growth tax-deferred, also have the added advantage of the contributions being tax-deductible.
Tax-Free
Certain investment assets are totally free of income tax:
-
Principal residence;
-
Tax-Free Savings Accounts;
-
Death benefit of life insurance policies.
Life Insurance as an Investment
While the death benefit of life insurance policies is tax-free, it is important to recognize that this also includes the investment gains made on the cash value portion of the policy. With this in mind, many investors have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, the results can be significant when compared to tax exposed or tax-advantaged investments.
Life Insurance for Estate Planning
One of the main objectives of estate planning is to maximize the amount we leave to our families or bequeath to our favourite charities. What many wealthy families have learned is that one of the easiest ways to accomplish this is to reduce the portion of the estate which is lost to the government to pay taxes at death.
While this helps explain why many individuals of wealth maintain life insurance, it also underscores the advantages of life insurance to anyone who will have taxes or other liquidity needs at death. In addition, using life insurance as part of a charitable giving strategy can provide significant benefits to both the donor and the charity.
As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.
Please feel free to share this article with anyone you think would find it of interest.
Copyright © 2020 FSB Content Marketing – All Rights Reserved
Protecting Your Family
Let’s face it, raising a family today can be financially challenging. The cost of living continues to increase, housing costs are rising along with education and extra-curricular activities for our children. It is tough to make ends meet and still have something left over at the end of each month.
Most families today require both parents to work to afford the lifestyle they enjoy. Losing one of those incomes through premature death, illness or a disability is a real risk that many families would have a difficult time facing emotionally and financially.
How do you protect your family?
-
Life insurance is designed to protect your family by providing the resource to replace income, pay off debt, and fund future education costs in the event that one of the parents dies.
-
Disability, or income replacement insurance, is designed to replace lost income if an individual is not able to work due to accident or sickness.
-
Critical Illness insurance will pay a lump sum benefit in the event of a diagnosis of many major illnesses.
If you and your spouse work for a company that provides employee benefits, you may already be insured for both life and disability insurance and in some cases critical illness. Be aware that for the most part, employee benefit programs provide only a minimum amount of life insurance, usually based on one or two years of income. If long term disability coverage is provided it may be enough for personal needs but that is not always the case. Each situation is different, so it’s important that you and your spouse review your respective plan information to ensure that you have sufficient coverage in place. There are options to top up your coverage either through your group insurance or individually.
How much life insurance do you need?
If you or your spouse dies, the family will require a lump sum of capital to replace earned income. You should aim to have enough cash for the following needs:
-
insurance to pay off any outstanding debts and mortgages
-
enough income from the invested capital to replace the lost income
-
an amount to cover future education costs
Think life insurance premiums are too expensive?
Term insurance is an affordable solution for a growing family with a tight budget. A 35-year-old non-smoking male can purchase $1,000,000 of ten-year renewable term insurance for less than $40.00 per month. A non-smoking female of the same age would pay less than $30.00 per month for the same coverage. A relatively small cost to protect a family for a total of $2,000,000 of tax free benefit in the event of an untimely death.
Let’s have a discussion about how we can build a program of protection specifically designed for your needs and circumstances. Knowing what the needs are and what protection is in place goes a long way to providing peace of mind.
Copyright © 2023 FSB Content Marketing Inc – All Rights Reserved
Whole Life Insurance – A Whole New Asset Class
The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse. For investors looking for a diversification in their investment portfolio and a more tax-efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.
Why is Whole Life Insurance a good investment?
-
The tax-advantaged steady growth, combined with significant estate benefits, are the primary reasons why Participating Whole Life is now being thought of as a new asset class.
-
Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.
Who should consider Whole Life Insurance as an investment alternative?
-
Anyone looking for stable returns on their investment portfolio.
-
For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax-deferred returns but also provides opportunities for Capital Dividend Account planning.
What Is Whole Life Insurance?
-
It is permanent life insurance protection – meaning it won’t expire before you do!
-
It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available.)
-
It has tax-advantaged cash value growth.
-
It can pay annual dividends (participating whole life).
-
Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax-advantaged growth is “paid-up additions.”
-
The assets of the participating pool are professionally managed and largely in fixed-income investments. Management fees are extremely low (some as low as 0.07% management fee), and the funds have very little volatility.
-
This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death, it is paid to the beneficiary tax-free.
Can I access the cash value of the policy?
-
During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender or policy loan.
-
Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third-party lender. And if structured properly, the interest on the loan may be tax-deductible.
Favourably compares to a long term, high yield bond
-
Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed-income investments, such as bonds, term deposits, etc.
-
Many investment managers suggest one-third to 40% of an investment portfolio be in these types of investments for balanced growth.
Including participating whole life in your portfolio can produce some significant results and reduce overall volatility.
Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.
Connect with me if you think you would benefit from this strategy, and as always, please feel free to share this article with anyone you think would find it of interest.
Copyright @ 2023 FSB Content Marketing – All Rights Reserved
Do You Need Life Insurance?
Canadians may need to rethink their risk management.
In a recent study conducted by the Life Insurance and Market Research Association (LIMRA), it was reported that 61% of Canadians hold some form of life insurance. Surprisingly, it also revealed that only 38% of Canadians own an individual life insurance contract.
In another study of middle class Canadians, Manulife reported that 79% had no individual disability insurance and 87% had no individual critical illness coverage. What both of these studies conclude is that most Canadians rely heavily on their group benefits for their family’s insurance protection.
What’s the problem with that?
-
Group insurance protection is tied to employment and if the company for any reason changes or cancels the coverage, the employee stands to lose valuable and necessary protection.
-
If you are currently employed in an industry or with a company that you feel is at risk due to economic conditions, it may be time to reevaluate your insurance mix. You lose your job, you may lose your life insurance protection.
-
For many group plans, the maximum life coverage provided is only two times annual earnings.
-
For those plans that provide critical illness coverage, the amount provided is very minimal.
What happens when you retire?
Almost all group insurance plans cease upon retirement which for most Canadians is still age 65. To protect spouses and dependent children, some life coverage should be maintained after age 65. Converting group life coverage to an individual plan can be expensive as you get older. Individual coverage purchased earlier in life is the most cost effective way to protect your family in the long term.
If you feel you may be at risk of being underinsured or in danger of losing your group insurance coverage it may be time to integrate some individual insurance protection into your portfolio.
Give me a call if you would like to discuss this further and as always feel free to share this article with those you think would benefit from this information.