Want to make a big impact on a charitable organization without making a large cash investment? One option to consider is gifting a life insurance policy or its proceeds.
“Anyone who has a charitable inclination can consider this type of planning,” says Barry Pascal, BA’20, “whether it’s a recent graduate, a professional, a couple, or a retiree.” A partner at Bell Pascal Insurance Services and a member of McGill’s new Strategic Giving Council, Pascal has 40 years of experience advising families and entrepreneurs in estate and succession planning.
How does this type of gift work? What are the benefits, and what pitfalls are to be avoided? Pascal is sharing his insights below.
What are the benefits of using a life insurance policy to make a charitable gift?
Life insurance gives us the ability to create tremendous value.
For example, if you want to make a charitable gift, you can give $1 to create a dollar of charity. But if you use that same dollar to buy life insurance, we can really multiply the effect, and create so much more.
This is an opportunity to do well by doing good; it gives you the opportunity to dream bigger.
It’s also worth noting that taxes are paid on the growth within traditional investments, whereas the growth within a tax-exempt life insurance policy is not taxable – the death benefit is paid to the beneficiaries on a tax-free basis. This provides a significant advantage in your estate plan, and in creating a significant charitable gift.
An important part of the planning process is deciding when you want potential tax credits: do you want smaller tax credits today, or bigger tax credits in your estate? Both can make sense, depending on your circumstances.
Would you want annual tax credits for a donation equal to the premiums? Or would you prefer to pay the premiums annually and then make a gift of the full proceeds of insurance at death? The first option gives you tax credits today; the second would have a greater impact on the tax liability in your estate.
What is the benefit of making McGill the beneficiary of a life insurance policy?
You can make McGill the beneficiary of a new or existing life insurance policy. It will result in a payment of the proceeds directly to McGill from the insurance company, bypassing the settlement of the estate. Your estate will receive a charitable tax credit for the full-death benefit, creating a sizable charitable gift in your estate as well as important tax planning opportunities.
What is the benefit of making McGill the owner and beneficiary of an existing insurance policy?
You can make McGill the owner and beneficiary of a new or existing policy.
For example, if you have an existing insurance policy that you’ve owned for several years, you may decide you no longer need that policy for its original reason: you’ve sold a business, you’ve retired, or you’ve done some additional planning and now have surplus coverage. You may be tempted to cancel it, but the years that have passed have made that old policy much more valuable.
For instance, I had a client who’d bought a policy 15 years ago. It was no longer needed, and they were considering cancelling it. Instead, we had an actuary determine the fair market value, my client contacted his favorite charity, and we transferred the policy to the charity. That resulted in a generous charitable donation receipt for the fair market value of the policy, and as the client continues to pay premiums, they’ll continue to get ongoing donation tax credits.
You may qualify for a tax credit of up to the fair market value of your policy. Careful consideration should be given to the tax implications of this transfer – I’ve helped clients use insurance to help create meaningful charitable legacies while enjoying significant tax benefits. Please keep in mind that all transfers are subject to tax regulations and consult your tax specialist before making a donation.
Who is the ideal candidate for gifting a life insurance policy to charity?
Anyone who has a charitable inclination can do this type of planning, whether it’s a recent graduate, a professional, a couple, or a retiree. For example, someone may already be giving annually to McGill and want to perpetuate their gift.
If you are involved in the estate planning process, such as writing a will, there are many factors to consider. Perhaps your finances have changed: you have gains in your stock portfolio, you’re doing a shareholders’ agreement for your business, or you’re approaching a liquidity event. It may be the right moment to think about a charitable gift.
Let’s say I have an existing life insurance policy. Is a lawyer, notary, or other professional required to make McGill the beneficiary?
It is a relatively simple task to designate McGill as a beneficiary; it requires the completion of a form with your insurance advisor. This could also be done through your will and in this case, could involve your lawyer or notary.
The most important issue is to establish your objectives and review the consequences with your advisors (accountant, insurance, lawyer and/or notary) prior to making any changes to your insurance.
What if the donor is still paying premiums on the policy? Are they eligible to receive tax receipts, and will those tax receipts be issued by McGill?
If McGill is the owner and the beneficiary of the policy, and you make the annual premium payments on behalf of McGill, then you will receive a charitable tax receipt from McGill for that amount.
When or how should I make McGill aware of my gift?
My opinion is: the sooner the better. Doing so won’t necessarily change the outcome, but it can change the experience.
Once you let McGill know, they’ll want to invite you to the University, include you in appreciation events, and inform you about what’s going on at the institution.
Sharing your intentions early also gives McGill the ability to plan for future generations of students. I always recommend that when you make this decision, share it with the people who are going to benefit.
You can include the members of your family and share the experience of charity together.
What impact does a gift of life insurance have on McGill?
When an insurance policy becomes payable after a donor has passed away, it provides them with the opportunity to create the impact they were dreaming of, while giving McGill the ability to do everything that makes it a best-in-class university. It continues the ongoing excellence of the institution.
Are there any pitfalls to be avoided when using a life insurance policy to make a charitable gift?
It’s important to make sure that it is the right type of policy, and that it is properly funded, properly structured, and accurately reflects your planning.
If it’s an extra policy that’s no longer required and you wish to repurpose it for a charitable donation, it’s important that you and your advisors review it to decide if you wish to make McGill the beneficiary of the policy, or the owner as well as the beneficiary.
Could you share a brief scenario that illustrates the benefits of using life insurance as a charitable donation.
Coverage can be put in place for an individual or a couple on a joint-life basis.
To create a $1,000,000 charitable gift through life insurance, a 50-year-old male insured in normal health who does not smoke would make an annual payment of $13,713 per year for life ($41,396 annual payments for 10 years OR a single payment of $581,830), creating $1M of charity at death on a guaranteed basis.
For the same outcome, a woman, age 50, would pay $11,861 per year for life ($36,050 annual payments for 10 years OR a single payment of $548, 830); and a couple on a joint-life basis would pay $8,736, per year for life ($29,359 annual payments for 10 years OR a single payment of $477,640).
Insurance gives the donor the ability to create a significant planned gift immediately and on a guaranteed basis; it can be funded over a lifetime, over 10 years, or even with a single payment, whichever is most suitable to the donor.
A planned gift through insurance enables donors to create a significant legacy while effectively managing their financial resources. With a little bit of planning, your dollars can have a much greater charitable impact!
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