How philanthropic Canadians can recycle their old life insurance policies

Use existing policies to create charitable legacies and save taxes, say experts

How philanthropic Canadians can recycle their old life insurance policies

For countless individuals across Canada, the notion of donating old unused items to charity is nothing new. But what most Canadians don’t realize is that they can, in certain cases, do the same thing with their unwanted life insurance policies.

“Many of us have old life insurance policies that likely would not move the dial on the family’s estate planning. Maybe you bought it when you had a mortgage, or young kids to feed and educate. Or perhaps you had a partnership agreement, and now the company no longer exists,” says Mark Halpern, CEO at (pictured above). “So you have this old insurance ‘furniture’ that doesn’t fit your current financial architecture’, and if you are philanthropic, you can actually benefit from it today.”

According to Halpern, individuals looking to donate their existing life insurance policy can get a fair market value [FMV] appraisal with the help of an independent actuary. At one time, that would only be equal to the cash surrender value [CSV] of the policy, but now a policyholder who’s gotten older and whose age and health – and consequently, their insurability – have declined over time can donate their policies at more significant FMVs.

He gave the example of a client with a $300,000 permanent policy who was diagnosed with Parkinson’s disease several years ago, making him uninsurable. “We engaged an independent actuary who determined the policy had an actuarial fair market value of $187,000. At that point, the client donated the policy to the foundation of his alma mater, and received a $187,000 charitable receipt”, says Halpern.

“Charities used to recognize only cash gifts, on the date that the cash gift came in, and not legacy gifts like bequests or life insurance. But that has really changed,” Halpern says.

Doug Hopkins, a wealth advisor at Investment Planning Counsel, says someone may choose to donate their insurance policy to charity and continue to pay the premiums. Under that arrangement, the donor will get a tax benefit for the ongoing premium payments, and the charity will ultimately receive the death benefit.

“The tax benefit to the donor will be smaller than the cost of the premium they’re paying,” Hopkins says.

Halpern cited another example of an individual in her late 70s who was going to cancel a $2-million permanent universal life insurance policy that she didn’t need. Her advisor reached out to Halpern to explore different options, and they recommended that she instead donate the policy to a charitable foundation she was previously involved with.

In that case, the policy had a fair market value of over $1 million, which she was able to claim as a charitable receipt. She also agreed to keep paying the premiums for the policy moving forward, which Halpern notes will also count as charitable donations to save future annual taxes.

“In Canada, there’s around $7 billion of term life insurance that falls off the books every year in the 65-year-old+ age category,” he estimates. “The policies expire or just become too cost-prohibitive for the person to convert those policies fully or partially to permanent insurance, so people decide they don’t need them anymore. Those policies can be converted partially or fully into permanent insurance with no medical evidence and also be donated to charity in the right circumstances.”

Charitable life insurance donations can also be a win to insurance advisors, says Halpern, as they would stand to receive commissions for facilitating the transactions.

Depending on the age and medical condition of the donor policyholder, Halpern says the recipient charity may agree to pay the premiums going forward too, but that’s not always the case.

“Many charities operate mainly on a cash basis, and they wouldn't necessarily want to pay the monthly costs or the annual cost of an insurance policy that might not pay out for many, many years,” says Hopkins.

“If it's an in an endowment-type fund or a big charity, where they've accumulated lots of money, then it's certainly a possibility,” Hopkins says. “You might find a charity that’s willing to do that, but it might not be your favourite charity.”

Earlier this year, Canada Life introduced My Par Gift, a first-of-its-kind life insurance policy that's specifically designed for charitable donations. Among other benefits, it generates yearly dividends that the beneficiary charity can collect as cash payments, giving them a valuable source of liquidity. 

Those looking to use life insurance for charitable donations, Halpern says, should also be mindful of so-called three-year and 10-year deeming provisions of the Income Tax Act. For the purposes of getting a charitable tax receipt, the donor must be able to demonstrate to the CRA whether a life insurance policy was purchased within three or 10 years of being gifted. This especially applies when converting a term policy to a permanent policy.

“The concern is that the CRA might not give you a fair market value receipt. You might just get the cost base proceeds, which will be significantly lower,” Halpern explains. “You might end up with a receipt that's not going to be advantageous to you, which is why you should always get proper professional advice.”