Donations of Existing Life Insurance Policies

Written on August 28, 2015 – 9:20 am | by Malcolm Burrows

In 2008, Canada Revenue Agency changed the valuation rules for donations of existing life insurance policies to registered charities. Previously, policy donations were receipted for cash surrender value, which many policies don’t contain. Now, policy donations are receipted for the appraised fair market value (FMV), which may exist regardless of the existence of cash or equity in the policy. What have we learned about these gifts so far?

1. Supply & Demand: There are more owners of mature life insurance policies who would like to make a donation than charities willing to accept them. Donations are often considered when the owner decides to let the policy lapse. A lapsed policy without equity has no value, but a donated policy can generate tax credit or deduction based on a tax receipt for FMV. But often policy owners do not intend to continue paying premiums after the policy is donated. Unless the charity pays ongoing premiums the policy will lapse and there will be no death benefit to support its charitable purpose. Hence few charities are willing recipients.

2. Valuation: There are now a number of qualified actuaries who value policies based on CRA’s guidelines IC 89-3(40) and (41). The process is straightforward for knowledgeable charities (which are in the minority due to internal expertise on technical issues). Generally, the best policies for donation purposes are permanent, level-cost, either with or without equity, and at least five years old. Although FMV reflects a moment in time, there is a debate about the legality and/or ethics of receipting a policy donation that is likely to lapse before it pays out and provides public benefit. Is the charity issuing a false receipt? In practical terms, why would a charity spend time and money on a gift if a future payout is unlikely? This issue has not been resolved, but it has made charities cautious about “dump and run” donations.

3. Life Insurance as Alternative Investments: Some larger charities, typically with unrestricted endowment funds, have accepted policies as an investment. Investment capital is used to pay the premiums because the actuarial rates of return are highly attractive. Many donated policies are safe, excellent investments if the charity has the funds and commitment to keep them in-force. While only a handful of charities have adopted insurance as an alternative class of investments, it is viable for the knowledgeable, committed and well-resourced charity.

In my experience, donors with strong charitable intent and clear estate plans are the best candidates for donating existing life insurance policies. These donors agree to pay the ongoing premiums and are committed to providing a future charitable benefit.

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The High Net Wealth Segment

Written on September 26, 2011 – 8:20 am | by Paul Fensom

In this Blog I will share some statistics about the High Net Wealth (“HNW”) segment and global trends as they relate to Estate planning and administration.
For the purposes of this article a “HNWI” is a High Net Wealth Individual having investible assets of $1 million or more, excluding principal residence and consumables.
As of 2010, there are 11 million people, globally, in this segment. Regionally, North America has the most people in this segment but for the first time the Asia-Pacific region has surpassed Europe.
The U.S., Japan and Germany account for 53% of the HNWI population, however, this percentage has been decreasing as wealth is being created in the emerging and developing markets. Canada ranks 7th, behind France and just ahead of Switzerland.
In Japan, 80% of the HNWIs are over the age of 55. By contrast the percentage of HNWIs in the U.S. over the age of 55 has been decreasing and is now at 68%. This trend is even more pronounced elsewhere. For example in the Middle East, 56% of those countries HNWIs are under the age of 55. This trend could mean that services to HNWIs will need to be delivered in more technologically efficient ways.
Another trend is the seen in the area of women who now account for 27% of the global HNWI population. Within this segment there are huge regional differences. For example 37% of the U.S. HNWI population are women. Nevertheless, the global trend is on the rise.
Not dissimilar to the population at large, the #1 concern for the HMWI segment is the impact of the economy on their goals. Interestingly, the #3 concern of the HNWI segment is that the next generation are not adequately managing their inheritance.
In terms of priroities for this group, capital preservation ranked #1. Succession planning and specialized advice ranked highly as well.

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