Can Life Insurance Policies Be Used as Charitable Donations in Canada?

Yes, life insurance policies can be used as charitable donations in Canada through two main methods: transferring ownership to a registered charity or naming them as beneficiary. Both options provide significant tax benefits including charitable receipts and premium deductions while creating substantial future gifts at relatively low current costs.

Many people think about giving money or property when they want to support a charity, but there’s another option that’s often overlooked: life insurance policies. Donating a life insurance policy to a charity is a powerful way to make a significant gift—one that can help an organization for years to come, even after you're gone.

In this article, we’ll explain how you can use your life insurance policy to support a Canadian charity, the tax benefits that come with it, and the steps involved in making this type of donation. Whether you’re an individual considering this kind of gift or a charity interested in receiving life insurance donations, you’ll find everything you need to know here.

What is a Life Insurance Donation?

A life insurance donation means transferring ownership of your policy to a charity or naming a charity as the beneficiary. When you do this, the charity either gets the payout from the policy when you pass away or it receives the policy itself during your lifetime.

Here is how it works:

• Charity as the Beneficiary: You keep ownership of the policy but name the charity as the beneficiary. After you pass away, the charity receives the death benefit.
• Charity as the Owner: You transfer the policy to the charity. The charity then owns the policy, and the death benefit goes directly to them.

This type of donation can be a great way to leave a meaningful legacy at a relatively low cost upfront.

Why Donate a Life Insurance Policy?

There are several reasons why you might choose to donate a life insurance policy to a charity:

1. Low Initial Investment, Large Future Impact

You may not have large sums of money to donate now, but your life insurance policy could be a way to contribute a larger amount later. Life insurance policies are often more affordable than donating a similar sum in cash, but they can provide charities with substantial financial support in the future.

2. Tax Advantages

Donating a life insurance policy comes with tax benefits. These benefits can include deductions on premiums paid and possibly a charitable tax receipt for the value of the policy when it’s transferred to the charity.

3. Easy to Set Up

This type of donation doesn’t require you to part with any assets during your lifetime, and it’s relatively easy to set up. Simply naming a charity as the beneficiary on your life insurance policy is enough to start the process.

How Does a Life Insurance Donation Work in Canada?

There are two main ways you can donate a life insurance policy to a charity in Canada, and each has its own benefits and considerations.

1. Transfer Ownership to the Charity

In this method, you give ownership of the life insurance policy to the charity. This means the charity takes control of the policy, and upon your death, they receive the full death benefit.

Key Benefits:

• You’ll get a charitable tax receipt for the fair market value of the policy.
• The charity can claim the death benefit, which could be much more than what you paid for the policy.
• You may also be able to deduct premiums paid on the policy as charitable donations, which can reduce your taxes.

2. Name the Charity as a Beneficiary

Alternatively, you might choose to keep ownership of the policy but name the charity as the beneficiary. In this case, you continue to make premium payments while you’re alive, but after your death, the charity gets the payout.

Key Benefits:

• You can still claim charitable receipts for the premiums you pay, which provides immediate tax relief.
• The charity doesn’t take control of the policy, and you retain the ability to make changes to the policy during your lifetime.
• This method is ideal if you’re not sure about transferring full ownership of the policy but still want to make a future gift.

How to Donate Your Life Insurance Policy

Ready to donate a life insurance policy to a charity? Here are the steps you'll need to follow:

Step 1: Choose the Charity

Start by choosing a charity you'd like to support. Make sure it's a registered charity with the Canada Revenue Agency (CRA). This ensures your donation qualifies for tax benefits.

Step 2: Decide on the Donation Type

Decide whether you want to transfer ownership of the policy to the charity. Or you can just name the charity as the beneficiary. This decision affects your taxes and the charity's ability to use the policy.

Step 3: Contact the Charity

Check with the charity beforehand to make sure they accept life insurance policy donations. Some charities may not have the resources to handle such donations.

Step 4: Work with a Professional

Talk to a financial advisor or Canadian charity law expert. They can guide you through the process. They'll help you understand the full tax implications and ensure everything is set up correctly.

Step 5: Complete the Paperwork

Once you've decided on the charity and donation type, fill out the appropriate forms with your insurance company. Notify the charity of your donation. Keep all documents for tax purposes.

Tax Benefits of Donating a Life Insurance Policy

When you donate a life insurance policy, you can enjoy several tax benefits:

1. Charitable Tax Receipt

When you transfer ownership of the policy to a charity, you can receive a charitable tax receipt for the fair market value of the policy. If you continue to pay premiums and name a charity as the beneficiary, you can also claim tax receipts for the premiums paid.

2. Premium Deductions

If you continue to pay premiums on the policy, you can deduct those premiums as charitable donations, which can help reduce your income tax burden. This makes donating a life insurance policy a tax-efficient way to support causes you care about.

3. No Capital Gains Tax

One of the big advantages of donating a life insurance policy is that it’s not subject to capital gains tax. If you were to sell the policy instead of donating it, you’d have to pay taxes on the capital gains. But when you donate it to a registered charity, you avoid this tax, making the donation even more valuable.

Are Life Insurance Benefits Taxable in Canada?

Life insurance benefits in Canada generally receive favourable tax treatment. Understanding this helps you make better decisions about charitable donations.

Death Benefits Are Not Taxable

In most cases, life insurance death benefits are not taxable income to beneficiaries. This includes both individual beneficiaries and charitable organizations.

The Canada Revenue Agency doesn't consider life insurance proceeds as income. This means charities receive the full death benefit without tax deductions.

Investment Growth May Be Taxable

Some life insurance policies build cash value through investments. If you surrender a policy with cash value, you may owe taxes on investment gains.

However, when you donate the policy to charity, you typically avoid these taxes. The charity receives the benefit without the tax burden.

Group Life Insurance Considerations

Group life insurance through employers may have different tax implications. Premiums paid by employers for coverage over $25,000 may be considered a taxable benefit to employees.

Consult with a tax professional to understand how group policies affect charitable donation strategies.

Is Life Insurance Taxable Income to the Beneficiary in Canada?

Life insurance payouts to beneficiaries follow specific tax rules in Canada. These rules affect both individual and charitable beneficiaries.

Tax-Free Death Benefits

Life insurance death benefits are generally tax-free to beneficiaries in Canada. This applies whether the beneficiary is a person or a registered charity.

The beneficiary receives the full amount without reporting it as taxable income. This makes life insurance an efficient way to transfer wealth.

Interest on Delayed Payments

If there's a delay in paying the death benefit, any interest earned on the benefit may be taxable. However, the original death benefit remains tax-free.

Charitable Beneficiaries

When a charity is the beneficiary of a life insurance policy, they receive the death benefit tax-free. The charity can use the full amount for their charitable purposes.

This tax-free status makes life insurance donations particularly attractive for both donors and charities.

How to Donate a Life Insurance Policy to a Charity

If you’re ready to donate a life insurance policy to a charity, here are the steps you’ll need to follow:

Step 1: Choose the Charity

Start by choosing a charity you’d like to support. Make sure it’s a registered charity with the Canada Revenue Agency (CRA) so that your donation is eligible for tax benefits.

Step 2: Decide on the Donation Type

Decide whether you want to transfer ownership of the policy to the charity or just name the charity as the beneficiary. This decision will impact your taxes and the charity’s ability to use the policy.

Step 3: Contact the Charity

It’s important to check with the charity beforehand to make sure they’re willing to accept life insurance policy donations. Some charities may not have the resources or processes in place to handle such donations.

Step 4: Work with a Professional

Talk to a financial advisor or Canadian charity law expert who can guide you through the process. They can help you understand the full tax implications and ensure that everything is set up correctly.

Step 5: Complete the Paperwork

Once you’ve decided on the charity and the type of donation, you’ll need to fill out the appropriate forms with your insurance company and notify the charity of your donation. Make sure to keep all documents for tax purposes.

Considerations for Donating Life Insurance

Before donating a life insurance policy, it’s important to consider a few things:

1. Cost of Premiums

If you choose to continue paying premiums after naming a charity as the beneficiary, make sure you’re comfortable with the ongoing financial commitment. If you stop paying premiums, the policy may lose its value.

2. Long-Term Commitment

If you transfer ownership of the policy to a charity, you’re making a long-term commitment. Make sure you’re confident that this is the right decision for you and your estate plans.

3. Complexity of Process

Donating a life insurance policy can involve paperwork and coordination with both your insurance provider and the charity. While it’s a relatively straightforward process, be prepared for some administrative effort.

Conclusion

Donating a life insurance policy to a charity in Canada can be an excellent way to support a cause you care about. Whether you choose to transfer ownership of the policy or name a charity as the beneficiary, this type of donation offers significant tax benefits and creates a lasting legacy.

By following the steps outlined above, you can ensure that your donation is set up correctly and that your charity receives the full benefit of your generous gift.

Contact B.I.G. Charity Law Group to navigate the legal and tax complexities of charitable life insurance donations. 

Our team at B.I.G. Charity Law Group specializes in helping both donors and charities maximize the benefits of planned giving strategies. 

We understand the intricacies of Canadian charity law and can ensure your life insurance donation is structured properly to achieve your philanthropic goals. Reach out to us at dov.goldberg@charitylawgroup.ca, call 416-488-5888, or visit CharityLawGroup.ca to get started.

Frequently Asked Questions

Here are answers to common questions about life insurance donations and related tax implications in Canada.

What qualifies as a charitable donation in Canada?

A charitable donation in Canada must be made to a registered charity with the Canada Revenue Agency (CRA). Qualifying donations include cash, property, securities, and life insurance policies. The charity must provide a tax receipt for donations over $20. To qualify for tax benefits, you must donate to organizations with charitable status, not private foundations or political parties.

Is life insurance a taxable benefit in Canada?

Life insurance premiums paid by employers are generally not taxable benefits to employees. However, if your employer pays premiums for coverage exceeding $25,000, the excess premium amount becomes a taxable benefit. Personal life insurance premiums you pay yourself are not tax-deductible, but they're also not considered taxable income.

Is the cash surrender value of a life insurance policy taxable in Canada?

Yes, the cash surrender value of a life insurance policy can be taxable in Canada. You'll owe taxes on the amount that exceeds what you paid in premiums (the adjusted cost basis). However, if you donate the policy to a registered charity instead of surrendering it, you can avoid these taxes while receiving a charitable tax receipt.

What disqualifies life insurance payout in Canada?

Life insurance payouts can be disqualified for several reasons: suicide within the first two years of the policy (contestability period), material misrepresentation on the application, fraud, or failure to pay premiums. Some policies also exclude death from certain activities like extreme sports or acts of war. Each policy has specific exclusions outlined in the contract terms.

Can you cash out a life insurance policy in Canada?

Yes, you can cash out permanent life insurance policies that have accumulated cash value in Canada. Term life insurance policies typically cannot be cashed out since they don't build cash value. When you surrender a permanent policy, you receive the cash surrender value minus any surrender charges. Remember that cashing out may result in taxable income on the gains.

How long does it take for a life insurance policy to pay out in Canada?

Life insurance policies in Canada typically pay out within 30 days of receiving all required documentation. This includes the completed claim form, death certificate, and any additional requested documents. Complex cases involving investigations or missing paperwork may take longer. Most insurers aim to process straightforward claims quickly to support grieving families.