Gifting insurance to charity

Most clients don’t know how they can use annuities and insurance to boost their charitable giving.

“People are saying, ‘Don’t buy annuities now because interest rates are low,’ ” says John Jordan, CFP, an insurance and estate planning specialist with Dundee Wealth Management in Kitchener, Ont. The other common argument is that life insurance is expensive, but Jordan asks, “Expensive compared to what?”

Insurance may be pricey at the front end, but it hedges against a client’s longevity and inflation by obtaining a policy for a larger sum than the client would be able to amass in cash.

Peter Andreana, CFP and partner of Continuum II Inc. in Burlington, Ont. is also a proponent of the multiplier effect insurance offers, noting it can help those who are concerned about being protected during their living years. “People want to leave a charitable gift, but you don’t want to do it by jeopardizing your current lifestyle,” he says.

Jordan uses the example of an average Canadian retired couple with approximately $350,000 in their RRSP at age 65. Both have work pensions, OAS and CPP, so they defer RRSP payments until age 71.

“If they average a 6% return, at joint mortality, they’ll have $350,000 left, so that’s a potential tax bill of about $150,000,” he says. “The example assumes they also have cash savings of $80,000. So they’re going to leave the Registered Retirement Income Fund to the family and the $80,000 to a charity.”

In this scenario, when both clients die, the family ends up with $225,000, the charity gets $80,000 and the government nets about $125,000. Not a great outcome when you consider that same $80,000 can buy the couple about $380,000 in life insurance with their children named as beneficiaries. A charity can then be tapped as the beneficiary of the RRIF, which produces income for the couple until they die and then washes the tax bill for the estate.

The children inherit considerably more, since the insurance proceeds pass to them tax-free, and the charity gets $350,000, instead of only $80,000. “It costs them nothing. They’re not getting much from the interest off the $80,000 and they weren’t using that money anyway,” says Jordan. “If we can reduce the amount going to Ottawa and keep it in the community, that’s a better thing.”

Andreana, meanwhile, uses a permanent insurance example—an older client with a $100,000 tax obligation that he’d like to eliminate. The client is 65 years old, doesn’t smoke and has the means to pay $7,600 annually to buy an annuity that covers a life insurance policy with a $206,000 estimated death benefit. At age 80, that death benefit reaches $250,000, at 85 it’s worth $312,000 and if the client reaches age 90, the benefit climbs to $384,000.

When the client dies, the substantial gift washes the tax obligation, helps the heirs, and provides a substantial gift to the charity that, again, would not be available if the client had simply chosen to accumulate cash.

Philip Porado is Executive Editor of Advisor Group. You may contact him at Philip.Porado@rci.rogers.com