Gifts of life insurance

If you choose to give life insurance, you can make modest premium payments that provide a substantial legacy gift. This type of gift is not subject to probate as the death benefit is paid directly to the university.

Gifts of life insurance can take several forms:

• Existing, paid-up policy: If you have an existing, paid-up policy that you no longer need, you can designate the university as the owner and beneficiary. You will receive a tax receipt for the cash surrender value of the policy, including accumulated dividends, earnings and adjustments.
• Existing, incomplete policy: By naming the university as the owner and beneficiary of an active policy, you will receive a tax receipt for its adjusted cash surrender value at the date of donation, and tax receipts for any additional premium payments made after the policy is assigned to the University of Calgary.
• New policy: If you get a new policy and name the university as the owner, you will receive tax receipts for the full amount of the premiums you pay. Generally, these policies are designed so that, after a few years, no further premium payments are necessary.
• Retain ownership of a policy, but name the university as beneficiary: In this case, your estate receives a tax receipt for the amount of the donation that can be claimed against 100 per cent of the estate’s income in the year of death. Any excess may be carried back one year.

A policy worth $150,000 would establish an endowment fund that could provide a $6,000 annual scholarship to a student (assuming a four per cent rate for endowment disbursements). Endowment funds generate annual interest or income on the principal. With a donation of $25,000 or more, we can establish an endowment fund to provide long-lasting support for scholarships, programs or projects.

Canada Revenue Agency has changed its treatment of gifts of term life insurance. These changes may lead to new tax benefits for donors, particularly where a term policy may have no cash surrender value, but may be quite valuable pending an actuarial review of the policy (due to factors such as the health of the insured or the term of the policy).

As you consider a gift of life insurance to the University of Calgary, we can work with you and your advisors to identify and document a specific arrangement that works for you. Please contact us for more information or to arrange an appointment at your convenience.

Example: Life insurance

Sarah has a paid-up life insurance policy with a face value of $100,000 that she is giving to the University of Calgary. The policy’s cash surrender value — the amount she would receive if she cashed it in — is $48,000.

Her adjusted cost base for income tax purposes is $20,000. This is calculated by taking the amount paid for the insurance policy, increased by capital gains made by the policy’s investments and decreased by losses in those investments.

Sarah will receive a donation receipt equal to the cash surrender value of $48,000, which means she will get a charitable tax credit for half of that value, $24,000.

We’re assuming Sarah is eligible for the 50 per cent Alberta charitable tax credit (The first $200 of a charitable donation is eligible for only a 25 per cent charitable tax credit). Let’s say Sarah has already made $200 worth of donations through the year, so she’s eligible to deduct a full 50 per cent of her donation to the University of Calgary.

Sarah’s taxable income is calculated as follows:

$48,000 (cash surrender value) - $20,000 (adjusted cost base) = $28,000 taxable income.

Assuming Sarah pays an Alberta combined marginal tax rate of 39 per cent on that $28,000, she will pay $10,920 in tax.

By donating the life insurance policy and receiving the charitable tax credit, she will save thousands of dollars in taxes:

$24,000 (charitable tax credit) - $10,920 (tax on income) = $13,080 (tax savings).

The University of Calgary could surrender the policy for $48,000 cash or retain the policy until it’s time to collect the death benefit.

It’s important to note that, for most life insurance policies, the adjusted cost base reaches zero after 20 to 25 years of premium payments. If it’s zero, the entire cash surrender value will be taxable income to the donor. The taxable income will be offset by the donation receipt, but the donor will receive no net tax benefits.