Considering that the proceeds of a life insurance policy are received tax free upon the death of the life insured, it is not surprising that the premiums of the policy are not tax deductible. There are two circumstances, however, where premiums would be deductible for income tax purposes:
- If the life insurance policy is assigned to a lending institution that requires the assignment as a condition for a loan, for either investment or business purposes.
- If the life insurance policy is donated to a registered charity and the donor continues to pay the premiums on behalf of the charity.
Life insurance policies used as collateral security for a loan
The conditions under which the owner of a life insurance policy would be entitled to a collateral insurance deduction are as follows:
- The loan advance must be made by a qualified financial institution that is in the business of lending money. This includes banks, finance companies, trust companies, credit unions or insurance companies. It does not include private lending arrangements such as with friends or family members;
- The lending institution must require the assignment of the policy owned by the borrower as a condition for granting the loan and a formal assignment of the policy must be made. There should be a letter or other documentation on file to substantiate the lender’s requirement for the life insurance assignment;
- The proceeds of the loan must be used for investment or business purposes the income of which would be taxable to the borrower;
- The life insurance policy assigned can be either an existing policy or one taken out for this specific purpose.
Many individuals have realized their charitable aspirations by donating a life insurance policy to the charity of their choice. In situations where that donation is a Universal Life policy, the use of a Shared Ownership strategy could prove to be a viable investment for the donor.
Shared Ownership refers to an arrangement involving cash value life insurance policies such as Universal Life. Universal Life combines life insurance with an investment fund which grows tax deferred until the cash value is withdrawn. If the cash value is paid out at death, the growth is tax free.
Under Shared Ownership, the life insurance and the cash value would have different owners and beneficiaries and would be structured as follows: Read more
If you are interested in creating a legacy at your death by making a charitable donation, you may wish to investigate using life insurance for that purpose. There are different ways you can structure life insurance for use in philanthropy. The most common are:
Gifting an Existing Life Insurance Policy
If you currently own a life insurance policy, you can donate that policy to a charity. The charity will become owner and beneficiary of the policy and will issue a charitable receipt for the value of the policy at the time the transfer is made, which is usually the cash surrender value of the existing policy.
There are circumstances, however, where the fair market value may be in excess of cash surrender value. If, for example, the donor is uninsurable at the time of the transfer, or if the replacement cost of the policy would be in excess of the current premium, the value of the donation may be higher. Under these conditions, it is advisable for the donor to have a professional valuation of the policy, done by an actuary, prior to the donation. Read more
By J. Denise Castonguay
Most successful business people feel a strong desire to give back, but what is the best way to make a meaningful contribution? Is setting up a foundation better than giving direct to a charity? If so, what is involved and what are your options?
Setting up a foundation gives you much more control than simply donating to charity. Even if you are very committed to a charity, charities change over time, and so may your interests or priorities. With a foundation, you can manage how your donation is spent, and can create a legacy of charitable giving for many generations. (If you want philanthropy to be a family tradition, you will need to accommodate different choices from other family members.)