How an insurance transfer can benefit charities and policyholders

More wealthy Canadians are donating certain life insurance policies they no longer need – and assumed had no value – to charity.

The little-known option is gaining more recognition among policyholders and larger Canadian charities looking for new ways to shore up donations.

The transaction is complicated: It applies only to certain life insurance policies and involves an actuary experienced at valuing them, as well as a charity willing to go through the complex process of taking over a policy. Still, it's a viable option for policyholders paying monthly premiums for coverage they no longer want or need.

"My guess is that there are hundreds, if not thousands, of Canadians who have one or more insurance policies which they no longer need, for one reason or another. A large number of policies just lapse every year," says John Budd, a partner and client portfolio manager with Cumberland Private Wealth Management Inc. and co-author of The Canadian Guide to Will and Estate Planning, which discusses the option in its just-released fourth edition.

In an interview, Mr. Budd uses the example of a family that has been paying a $2,000-a-month premium on a life insurance policy for about 20 years, but felt it was no longer needed. The policy had no cash surrender value and the client was prepared to cancel the monthly payments – and maybe invest that monthly sum instead going forward.

"Cancelling a life insurance policy is a serious decision which should not be made lightly, and only after discussing with family members and getting professional advice," Mr. Budd says. "We urged him not to cancel the policy without first getting advice from an insurance expert who is familiar with life insurance for philanthropic purposes."

If a charity agrees to take over the ownership of the policy, the donor receives a charitable donation tax receipt for the fair market value, which can be claimed for the year in which it was donated.

"By not cancelling the policy and instead donating it, the person can achieve their philanthropic goal and also benefit," Mr. Budd says. Still, he cautions anyone considering this move to get some tax advice first, to make sure it works in their individual circumstance.

In this type of transaction, the charity becomes the legal owner of the policy and is responsible for the premiums, which it can pay for by seeking out other donations. Or, it might request the person transferring the policy make a donation, either regularly or in a lump sum, to cover future premiums. The charity may also decide to pay the premium using its donation assets. Charities are likely to prefer taking over policies when they have someone to cover the premiums.

Andrew Guilfoyle, a partner at Toronto-based wealth-management firm Guilfoyle Financial, which has helped facilitate a few of these gifts, says they're slowly becoming more common.

"It's a way for people to direct part of their estate to charity … in a very tax-effective way," he says. "We say to people, 'Before you give this up, talk to someone to see if it works.'"

Mr. Guilfoyle says the value of the policy has to be significant, usually more than about $250,000 for charities to consider it, given the complexity and various steps required to handle the transaction. He says hospitals in Toronto have been leading on these types of transactions and expects educational institutions to start looking into them, too.

"As the charities become more comfortable, the challenge becomes: How do you find these policies?" Mr. Guilfoyle says. "It's a fairly unique set of circumstances, but that's part of why it works. … You have to find someone with a valuable life insurance policy who has decided to give it up."

This type of transaction isn't suited for all charities, but many larger ones are open to accepting policies under the right circumstances, says Denise Fernandes, who handled a number of them in her previous role as director of gift and estate planning at the SickKids Foundation in Toronto.

Ms. Fernandes says charities need to consider the value of the policy, as well as the costs and administrative work required for them to take ownership of a policy.

"The process is combined with the charity, the donor and the adviser so that together they can make the decision about whether the gift will happen," says Ms. Fernandes, who is now senior director of philanthropy, major gifts, at the St. Michael's Foundation in Toronto.

That said, Ms. Fernandes believes this method can be a great way for policyholders to donate to charities.

"I really think it's a great way to give," she says. "Charities need the money now, but in order to be a successful longer term, they need to think about the future. These policies help them with future fundraising."