About 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:
A policy worth $150,000 would establish an endowment fund that could provide a $5,250 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.
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.
See Sarah’s taxable income is calculated below.
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.
Sarah's taxable income breakdown
Donation receipt = $48,000.00
Tax credit (50% in Alberta) = $24,000.00
Cost of insurance policy = $20,000.00
Taxable income $28,000.00
- $48,000 (cash surrender value) - $20,000 (adjusted cost base) = $28,000 taxable income
Tax on income (38%) = $10,640.00
- 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.
Net tax savings = $13,360.00
- $24,000 (Tax credit) - $10,640 (taxes owing)