New insurance product for charitable donations could minimize philanthropy risk

Canada Life has launched a participating life insurance product designed to be donated to a registered charity and that seeks to resolve concerns around insurance trafficking.

The insurance product is called My Par Gift and is the first of its kind, the company said. Upon purchasing the policy, a client pays a single, lump-sum premium, thus fully paying for the policy. The client receives a tax receipt from their chosen registered charity for the premium payment, and that charity then becomes the policy’s owner and beneficiary.

Andrea Frossard, senior vice-president, Par Insurance Solutions, with Canada Life, said ideal clients for the product are philanthropic high-net-worth people, as the minimum lump-sum premium is $10,000.

“We decided for this product, rather than going with a minimum death benefit, we would do a minimum premium amount because that’s how people think of donations,” she said. The death benefit would then be determined based on the premium paid.

Frossard said there are benefits to using donation dollars to purchase an insurance policy over giving the same amount as cash, even though cash is more immediate.

A donor has “leveraged their donation, for one,” she said, since a $10,000 premium would yield a higher death benefit. And, because the policy is participating, the charity may receive annual dividends that can be used to buy additional coverage — thereby growing the death benefit — or taken as cash. Since My Par Gift is a non-exempt product, cash dividends would normally be taxable, but registered charities are exempt from paying tax.

“As a donor, you’re giving the charity a lot of flexibility,” Frossard said.

“The social good this product will do for Canadian charities cannot be understated,” said Ruth MacKenzie, president and CEO of the Canadian Association of Gift Planners (CAGP), in a release. “Life insurance has always been a powerful tool for Canadians to protect their families, and now that impact can be extended to support their most-loved causes, while also taking advantage of Canada’s favourable tax, financial and estate planning system.”

Donations of life insurance have traditionally been challenging in the many provinces that prohibit unrelated parties from purchasing life insurance policies, also known as trafficking. The regulations exist to protect desperate policyholders who may be pressured to sell their policies at a deep discount to face value.

In a 2021 notice, the CAGP warned that while regulators do not generally consider philanthropic donations of policies to constitute trafficking, provincial insurance regulation is “very broad, and as such, donors, charities and insurance advisors must act carefully to ensure compliance.”

For example, the CAGP’s best practices for insurance donations recommend that there be “a clear relationship between the donor and the charity prior to the gift being made,” such as a history of volunteering and/or previous gifts. Further, a red flag is when the size of a policy’s death benefit “is very large relative to the donor’s and/or charity’s financial situation.”

Nonetheless, following best practices does not guarantee that a donation of life insurance would be risk-free, the CAGP stated.

Frossard said that because My Par Gift is non-exempt, the underwriting process involves anti-money laundering due diligence, which should address most of the CAGP’s best practices. Furthermore, Canada Life will only underwrite the product if the charity is registered with the Canada Revenue Agency. (This means donor-advised funds also qualify, she said.)

However, the product does not require a previous history of donation to the chosen charity. “We’ve had extensive conversations both internally and with our reinsurers, feeling that if somebody’s willing to make a $10,000 donation to a registered charity in Canada, that was sufficient evidence that there is connection to that charity,” Frossard said.

In 2019, concern arose about whether B.C.’s insurance legislation prevented charitable donations of life insurance policies, as well as the solicitation of policies by charities. The following year, B.C. clarified that “donating and accepting insurance policies as a result of proper estate or financial planning is considered acceptable.”

In 2022, the Superintendent of Insurance of Alberta also clarified its position on donations of life insurance. It said that donating using one of the following three methods would not be considered trafficking:

• If new policy is taken out in the name of a bona fide charity and the insured receives a tax receipt for the premiums paid.
• If an insured names a bona fide charity as the beneficiary of an existing policy, the charity receives the benefits at time of death, and the estate receives a tax receipt.
• If an insured transfers ownership of an existing policy to a bona fide charity and receives a tax receipt for the cash value of the policy.

The Canada Life product would more than satisfy method number one, Frossard said, because the registered charity becomes both owner and beneficiary. Canada Life did not consult with provincial regulators when developing the product, she said.

Frossard said insured people with term policies may be able to convert them to My Par Gift. She also confirmed the product is priced similarly to comparable ones within the company. However, since the full premium is paid up front, that amount “has the ability to accrue interest, so you’ll see the policy looks better than a traditional one when you look at illustrated values.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.