A charity can acquire a life insurance policy under which the donor is the life insured and the charity is the beneficiary. Since the charity does not have an insurable interest in the donor, the charity must obtain the donor’s consent when applying for the policy; this is usually a minor formality. Alternatively, the charity can become the owner and beneficiary of a policy that is already owned by the donor. The donor will be the life insured.
Where a donor donates a life insurance policy to a charity or a charity takes out a policy on the donor’s life, the premiums paid by the donor will be considered a charitable donation eligible for a charitable tax credit (for individuals) or deduction (for corporations). Note that Canada Revenue Agency has confirmed that the beneficiary designation need not be irrevocable in order to obtain this treatment. The donor may also get a credit or deduction for the value of the policy if an existing policy is donated. However, upon death, no further tax benefits accrue to the donor or his/her estate.
One point of caution: generally, premium paid prior to the transfer of a policy will not qualify as charitable donations; only those paid after the transfer will be receipted. Although, for a newly issued policy, the fair market value of the donated policy may well be the amount of premiums paid to the point of transfer.
Under each of the alternatives (whether issued to a charity or transferred to a charity after issue), the donor will continue to make the premium payments on behalf of the charity owner and will be entitled to a donation tax credit for the amount of the premiums. Either the donor can pay the premium to the charity who will forward the funds to the insurance company or the donor can pay the premiums directly to the insurance company.
If the donor ceases paying premiums, the policy may lapse or the charity, as owner, may continue to pay premiums or surrender the policy for its cash value, if any. At death, the charity will receive the death benefit directly, as beneficiary of the policy. The policy proceeds will not pass through the donor’s estate.
Source: Manulife Financial Tax, Retirement & Estate Planning Services November 2014