How to donate life insurance

Would you like to do something special for a wildlife fund or your favourite public radio station? One way is to make provision for part of your life insurance to be paid to your favourite charity.

You can also reduce your income tax when you make a donation. How do you do this? You can donate your own policy during your lifetime. You can name the favourite charity as a beneficiary, or you can leave the money to the charity directly through your will.

When you leave the money to charity through your will, you can designate "estate" as your beneficiary. This means that the will declares who gets paid what amounts. Be aware that a family member who felt this was unfair, might contest this will. Any creditors will have claims on the estate and you, will incur probate costs.

What if you change your mind? If you are concerned about this, then you keep the ownership of your life insurance policy. Did you not know that you do not necessarily own your policy? For example, your spouse can own your policy and you can own theirs. If your life situation changes and you want to change your beneficiary, then this is not impossible for you to do.

When you name a charity as beneficiary of your life insurance policy, then your executor can claim the tax credits for the year of death, or the year prior to death. If you choose the will and estate option, then you do give your executor some abilities that are helpful. The life insurance gives cash to pay out any outstanding debts. The executor could donate shares instead of cash to the charity. This makes the capital gains on the shares tax-free.

The accounting advantage is that your executor claims charitable donation tax credits from a gift by will, either for the year prior to death, or the year of death.

What if you want to claim the tax credits right away? Then you donate your life insurance policy to that charity while you are still alive. You will get a charitable donation receipt equal to the value of the policy.

Check with your accountant about receiving a T5 tax gain. Discuss what is the best option for you, if you wish to give a gift to charity when you pass on.