Normally, in all my previous blog posts and in my Online Legacy Bootcamp I advocate for simple legacy programs that focus on gifts in wills and in memory/honour donations. But did you know that in some countries, life insurance is also a great source of legacy gifts?
In Canada and the US, life insurance gifts as part of a “planned giving” program is common practice. However, no data is currently being collected as to what percentage of all planned gifts come from this form of legacy gift.
Interestingly, in France, life insurance donations are the preferred form of legacy gifts for donors with children because they fall outside of the estate distribution and that obligatory asset distribution to children*.
First, a little bit of history
Life insurance is not a new concept. In fact, it dates back to 100 B.C.!
You see, Romans believed that anyone who was improperly buried would become an unhappy ghost. So this Roman military general, Gaius Marius created a burial club among his troops in the event that a club member died, other members would pay for the funeral expenses. The concept became largely accepted by the government and the military and eventually clubs were formed to also include a stipend for the survivors of the deceased.
Fast forward to 1686 London where ship captains, ship owners and merchants would gather at Edward Lloyd’s Coffee House to talk news. This is where the concept of marine insurance was born and the modern concept of insurance came into being under the name of Lloyd’s of London. Horrifyingly interesting, Lloyd’s obtained a monopoly on maritime insurance related to the slave trade and maintained it until the early 19th century …. that’s just fan-friggen-tastic, isn’t it?! 🤨 😠
Not all insurance policies are created the same
There are various insurance products out there and they vary but to simplify matters for the sake of understanding some of the fundamentals, there are three main types of policies: term, whole and universal life insurance policies.
Temporary (term) life insurance is written for a specific period and pays the death benefit if the insured dies within that period. There usually isn’t a cash value built up and the policy owner pays only the cost of protection against death.
Whole life insurance policies provide a guaranteed death benefit, guaranteed cash value and a fixed annual premium. If the policy pays dividends, they can be applied to the premiums, received in cash, or used to purchase paid-up additional insurance (that last option will increase the death benefit).
Universal life insurance policies are a combination of term insurance and a tax-deferred investment account. The cash value, death benefit and premium payments are not fixed and guaranteed.
The different options
There are various methods by which a life insurance policy may be contributed to a charity. A donor may:
- Assign irrevocably a paid-up policy to the charity
This type of life insurance gift is attractive to charities because it’s equivalent to an outright gift of cash. The charity can choose to immediately surrender the policy for cash but in most cases, charities retain the policy until the insured passes away and it can collect the death benefit. Meanwhile, the cash surrender value (the sum of money an insurance company pays to a policyholder in the event their policy is voluntarily terminated before its maturity) will likely continue to grow.
This option is great for older donors that purchased policies years ago to provide family protection or to back a loan. Now the children are grown, the loan has been paid off and they have achieved financial security and no longer need this paid-up policy.
In this case, the charity will have the policy evaluated by an actuary to determine its cash surrender value . This cash surrender value will be the amount of charitable tax receipt the donor will receive when they transfer the ownership to the charity.
- Assign irrevocably a life insurance policy on which premiums remain to be paid
This type of gift is attractive if the policy is whole life and has been in force for two or more years because it will likely have some cash value which is accessible to the charity. Likewise, a universal life insurance policy may have cash value. Assuming the donor continues to pay the premiums, the cash value will increase each year, and the charity will eventually collect the death benefit.
This is of interest to donors that have an unpaid policy and that have concluded that their other investments are sufficient to meet family needs. It’s the best way for them to make a charitable gift without impairing other assets intended for family members.
By assigning the charity as the owner of the policy, annual premium notices will go to the charity. Once the donor has paid the premium, the charity issues the charitable tax receipt to the donor for the amount of the premiums paid. If the donor does not pay the premium, the charity will not issue the tax receipt and can choose to pay the premium on behalf of the donor or cash in its value.
- Name the charity as owner and beneficiary of a new policy
Although the policy has no initial cash value, whole life and universal life policies will accumulate cash value and pay a death benefit if the insured dies while the policy is in force.
This is for donors who want to make a major future gift and cannot currently afford a large outlay of money but are willing to purchase a new policy. The charity with a lot of younger donors (in their 30s or 40s) will want to explore this type of life insurance donation. Why? Because insurance premiums are lower for younger donors.
The donor buys a new life insurance policy and designates the charity as the owner and beneficiary of the policy. It’s important to point out that the policy should state that premiums are to be paid within a limited period of time, for instance, no more than 10 years (people get tired of paying bills and the charity wants to avoid having to pay the premiums on behalf of the donor). The donor will benefit from a charitable tax receipt for the amount of the annual premiums.
What all these types of life insurance gifts have in common is that they can all be assigned in the donor’s will – assuming receiving a charitable tax receipt is not necessary during their lifetime.
This has been a very general and quick overview of how charities can add another relatively simple legacy donation vehicle to its arsenal. It may not be for every charity and it’s important to do a realistic assessment of the donor base and resources available. If you want to explore this as a possible donation offering for your donors, speak with me. We can do an assessment of the potential and devise a plan to integrate life insurance in your legacy program.
* According to Napoleonic law and article 912 dated 23 June 2006 law of the French Civil Code, a percentage of the estate of the deceased must be passed on to their children. In France that amount depends on the number of descendants, i.e.: 1 child = 50% of the estate; 2 children = 66%; 3 or more children = 75%. These percentages will vary by country that applies civil law.