Last Updated: Friday - 09/24/2010
Week of October 28, 2002
Insurance can benefit charities
Drafting a final will allows you to give to causes you love
By GEORGE LUCAS
Special to the WCR
The typical idea of life insurance revolves around family protection that provides enough money to the surviving spouse to take care of children, pay off the mortgage, etc. What many people don't realize is that life insurance is used for many other reasons such as business purposes, succession planning, and more recently for charitable and planned giving.
In Canada, it is estimated that the over-60 generation will hand down more than $1 trillion in wealth to the next generation. We hear of the large estates held by high profile business people. There are also the people next door who bought their house in the '60s, a cottage in the '70s, and have a pension plan and RRSPs which suddenly add up to significant wealth.
Traditionally, these people would have accumulated their wealth to pass it on to the next generation, but there seems to be a changing philosophy in this regard. The next generation often includes children of the baby boomer generation.
These are children who had a better material upbringing, better education chances and a broader range of opportunities in adult life. In many cases, the parents feel they do not want to leave all of their wealth to the children and would like to contribute instead to their favourite arts group, charity or foundation.
The Government of Canada has gone so far as to enhance the tax credits available to donors to encourage contributions.
There are only two types of life insurance products - lifetime policies and non-lifetime policies, but with many variations in each depending on an individual's requirements.
Lifetime policies, also known as permanent policies, are policies that last as long as you live. If you live to be a 100, you will still have coverage under this type of policy.
Non-lifetime policies, include everything else such as your group insurance at work - when you retire it's gone; your mortgage life insurance - when the mortgage is paid off it's gone; plus many types of term insurance that expire at certain ages, be it 60, 70 or even 80.
For planned giving purposes, lifetime coverage is the norm. While there are numerous variations of lifetime policies, we'll discuss only the broader context.
Life insurance is an easy to manage gift that one may wish to give to an institution, charity or foundation to ensure a legacy in perpetuity
How can life insurance be used for planned giving?
In the first example, a potential donor may already have an existing lifetime policy that they've had for a number of years. Chances are that the named beneficiaries on the policy include the spouse, children or other loved ones.
In this situation the donor may consider adding a beneficiary so that it could read: spouse, 50 per cent; child A, 20 per cent; child B, 20 per cent; charity, 10 per cent.
In the second example; a potential donor has already allocated a certain amount of dollars in their will to their favourite charity. With this scenario, the donor already has the money on hand, sitting in the bank or in some type of investment.
In assessing their options, it is possibly advantageous for the donor to look at using the allocated money to pay life insurance premiums because there is a good chance the life insurance policy may leave a larger gift to charity than the money in the bank would have.
The larger gift also results in an increased tax credit for the donor's estate which will offset taxes due, especially upon the collapse of RRSPs, thus preserving more money for heirs.
Every life insurance policy has three parties associated with it - the owner of the policy, the life insured and the beneficiary(ies).
The life insured has to be a natural person, but the owner and the beneficiary can be any legal entity such as a person, company, charity, foundation, etc. When structuring a life policy for planned giving purposes, the donor (life insured) has three scenarios to consider:
The choice of plan to suit your needs can be made after discussion with a life agent and/or an accountant familiar with the donor's situation.
- Have the charity as the owner and beneficiary. In this case, the donor gives a contribution every year to the charity to pay the premium and the donor writes off the annual contribution as a charitable donation. This approach would probably provide the most confidentiality to the donor.
- 2) The donor as the owner and the charity as the beneficiary. In this case, the tax credit for the donor's estate won't occur until the donor dies and the insurance pays the charity. The benefit to the donor, as owner of the policy, is that he or she can change the beneficiary if they wish. As well, the final gift is a private matter between the charity, the donor and possibly a close family member.
- The donor as the owner and the donor's estate as the beneficiary. In this case the donor makes a provision in their will for the donation. While this arrangement provides a large degree of flexibility, it's possible that the will could be contested thus interfering with the planned gift. As well, a will becomes public knowledge on execution and the donor may have wanted the gift to be a private matter.
Today, people of all ages are becoming far more sophisticated about finances. Life insurance should be given serious consideration as one financial option. Donors may be able to increase the amount of their gift while getting a larger tax credit for their estate which in turn would keep more of their money for their heirs.
Life insurance is an easy to manage gift that one may wish to give to an institution, charity or foundation to ensure a legacy in perpetuity.
(George Lucas is a licensed insurance agent with Morgex Insurance Group Ltd., Edmonton, and can be reached at 413-6690 (ext. 403) toll free 1-800-272-8848 (ext 403).)