Insuring' the Financial Success of Charities
Adam Aptowitzer, December 13, 2007
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| I have written before about the importance of charities being flexible in their thinking when raising funds. In this way, charities may be able to amass donations of items they would otherwise never have sought let alone receive. One such area that deserves further focus by charities is that involving life insurance. |
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| Many people conceive of life insurance as a product that is bought specifically to provide for one's family at the death of the primary earner in a family or to pay costs arising on death. However, life insurance is purchased for a variety of reasons. For example, life insurance plays an important part in business arrangements such as collateral for a loan or to provide funds for a share purchase arrangement. No matter the reason that life insurance was purchased in the first place, the possibility always exists that that reason may cease to exist (for example a business loan was repaid or children in a family are financially independent). |
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| In the United States, a market has arisen for the purchase of life insurance policies by large funds that effectively purchase the policy from the policyholder. In these cases, the individual receives some amount (likely, more than the cash surrender value of the policy) and assigns the policy to the purchaser. The purchaser then becomes the beneficiary of the policy and takes over the payment of premiums of the policy. The purchaser will make money if the insured individual dies before the purchaser has spent more (in the initial purchase and combined premiums) than the payout of the policy. |
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| In most Canadian provinces securities legislation prohibits the practice of buying life insurance policies. However, the donation of insurance policies to charities may be a source of significant revenue for the charity and provide a place for owners of superfluous life insurance policies to dispose of them. |
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| From a tax perspective, the donor will have an income inclusion on the policy equal to the cash surrender value less the adjusted cost basis of the policy (the "ACB"). The ACB calculation is itself rather complicated and takes into account the premiums paid, dividends received and for policies purchased after 1982 the Net Cost of Pure Insurance (the "NCPI"). Despite the ominous name, the NCPI is not overly difficult to calculate although it will likely require professional advice from either an experienced lawyer or the insurance company involved. The tax owing on disposition of the policy would be offset by the tax credits (or deduction as the case may be) of the donation. |
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| From the charity's perspective, it can either cash the policy and use the funds immediately, or it may decide to pay the premiums on the policy and collect the larger death benefit when the insured dies. Of course, a very generous donor may not only donate the policy to the charity but donate the yearly premiums to the charity as well. Furthermore, the charity will have to meet the standard disbursement quota requirements and so may have to consider requesting that the insurance policies be subject to the typical ten-year gift requirements. If the charity does not carefully manage its disbursement quota issues, it may be required to cash in the life insurance policy simply to meet the quota. |
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| The purchase of life insurance policies in the United States is a well developed market but not one which is likely to develop in Canada. However, there is no reason for charities to shy away from the donation of insurance policies. Charities may be doing both themselves and owners of life insurance policies a big service by entering this market in a vigorous way. |
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