Donor Policy

Using a life insurance policy to create a charitable bequest

by Chris Ireland, Jul 1, 2011

Gifting an insurance policy to charity is a popular option - largely because charities can now issue a donation receipt for the fair market value of the policy, as opposed to just the cash surrender value.

For example, Laurette Brown, 65 years-old, has owned a $2 million Term 100 life insurance policy (insures the holder until age 100 or life, whichever comes first) for 20 years. The policy has no cash surrender value, but does have its face value when she dies and a fair market value today of $700,000.

Since Brown's heirs don't need the money - she's leaving them a house and shares of her late husband's company - rather than let the policy lapse, she could donate it to a charity and get a receipt equal to $700,000. Because she lives in Ontario and has made at least $200 worth of other donations during the year, she'd receive a tax benefit of approximately 46% of $700,000, or $322,000.

Additionally, the government will see Brown as having disposed of her policy for proceeds only equal to the policy's cash surrender value, which is $0. So, even though the the fair market value is $700,000, and the charity can legitimately issue a donation receipt for this amount, the donor has no gain in her income.

Charitable concerns

It's a simple plan for the donor, but the charity must issue the donation receipt and wants assurance that future premiums on the policy will be paid; otherwise the charity would be responsible for that financial commitment. The charity should engage a professional actuary to value the policy, but with $2 million coming their way, it's a small price to pay (and the donor may be willing to pay the actuary).

Keep in mind charities generally don't want to receive or give receipts on policies that are not permanent (e.g. Term 10 or Term 20 policies), because they have significant premium increases on renewal and there may be no guarantee future premiums can be funded at the increased amounts.


  1. Don't lapse a high-value life policy that you have owned for 10 or more years, or if your health picture has changed since you took it out.
  2. Consider gifting the policy to a favoured charity.
  3. Talk to an accountant to make sure you can take advantage of the tax write off when the charity issues you a receipt.
  4. You have five years to take advantage of the gift receipt in the event you don't pay enough tax to use it in a single year.
  5. Charities want to make sure someone will continue paying the premiums
    on a gifted policy.


Chris Ireland is a senior vice-president, planning services, PPI Advisory.

This article originally appeared in Canadian Capital. It is reprinted with permission.

These resources are provided for reference only and do not necessarily represent the opinions of Guilfoyle Financial Inc. Please consult your own tax and legal advisors.