Life insurance is an effective way to make a significant future donation, but the unfortunate reality is that charitable policies have a high lapse rate. Thousands of policies have been donated since 1979 when the Canada Revenue Agency allowed premiums to be receipted. Sadly too few pay out to fund charitable programs.
There are some practical reasons for the lapse rate.
- Charitable life insurance policies are sold in the moment, but are paid for over time – often a lifetime. People’s priorities change; policies lapse.
- Charities often struggle to administer the policies they own. To keep policies “in force” requires good systems, staff continuity, knowledge, and active donor stewardship. Even established charities may find these challenges daunting over a 30-year period.
- Once a charity is named owner and beneficiary of a policy the donor cannot change the beneficiaries. Charitable interests change over time. Letting a policy lapse is often a logical action for a donor stuck with a policy that will be paid to an out-of-favour charity.
A better way to structure gifts of life insurance is to separate the owner/beneficiary from the ultimate beneficiary, that is, the intended charities. An intermediary charity, like Aqueduct Foundation, serves as owner and beneficiary of an irrevocable gift of a life insurance policy. Through the mechanism of a donor advised fund, the donor may select, through a recommendation, the ultimate charitable beneficiaries and update the list at any time. The death benefit may be paid out to the chosen charities or an ongoing donor advised fund. The ability to change the ultimate beneficiaries makes gifts of life insurance as flexible as a gift by will.
In terms of set-up and administration, this structure is particularly helpful when the donor wishes to benefit a number of charities. Working with a single knowledgeable, neutral charity improves the donor experience by simplifying set-up and reducing paperwork. There is only one annual tax receipt. The donor also has the ability to pay premiums with tax-effective gifts of public securities. Finally, like a will, this structure provides privacy for the donor.
Life insurance is a powerful instrument that can leverage significant wealth for charities and most donors have genuine philanthropic intentions. Rethinking how we structure these gifts will help reduce lapse rates, increase dollars for charities, and make happier donors.