ON August 17, 2009, a research was completed on the concept of “Life Insurance for Charitable Gifting”. The main objective of this research was to determine;

* If the concept of Life Insurance for Charitable Gifting more commonly practised in North America could be implemented here in Jamaica under our existing laws.

* The benefits, if any, to be derived in implementing such a concept?

Coming out of this research, we found that life insurance premiums can qualify under the income tax act as a deductible expense once the proceeds of the policy is donated to an organisation established and operated exclusively for charity or for educational purposes and approved by the minister responsible for finance by order. In addition, we also found that under the insurance act 2001, it is possible to name a charitable organisation as the beneficiary of ones policy. So in summary, the concept of Life insurance for Charitable Gifting can be implemented here in Jamaica under our existing laws.

But what really is Life Insurance for Charitable Gifting? Life Insurance for Charitable Gifting is the use of life insurance to make charitable gifts. This can be an effective and cost-efficient means of fulfilling charitable intentions without making a sizable donation while alive. Depending on the type of insurance used and the nature of the gift, charitable donations involving life insurance often can result in income tax deductions for the donor and current as well as future value to the charitable recipient.

It has always been the case where, one could receive a tax credit on their estate by either donating the cash surrender value or the proceeds of a life insurance policy to charity. This was normally done by simply adding the charity as the beneficiary of the policy. However, under this new concept of Life Insurance for Charitable Gifting one can get an immediate tax credit once the donor irrevocably assigns the policy to the charity as provided for under the insurance act 2001 and make the charity the beneficiary of the life insurance policy.

To receive a tax benefit, the money donated must be considered a gift by the Tax Audit and Assessment Department. Gifts generally include; cash, gifts in kind, like stocks and real estate or a right to a future payment, such as proceeds from a life insurance policy.

The donation of the proceeds or cash values from a life insurance policy must be made to authorised charitable and educational organisations as provided for by section 13 (1) (q) of the income tax act. Section 13 (1) (q) of the income tax act states; “the amount of any donations (not exceeding one-twentieth of the statutory income) to any institution or organisation established and operated exclusively for the charitable or educational purposes and approved by the minister responsible for finance by order”. While the definition for statutory income under the same act states; “subject to section six, the aggregate amount of income of any person from all sources remaining after allowing the appropriate deductions and exemptions under this act”.

So, with this in mind, we now know that a donation can be a present gift that a charity can use now or a deferred gift that is available in the future, usually through a life insurance policy after the donor’s death.

So how will this work? Well, according to the Tax Audit and Assessment Department, “if you irrevocably assigned your life insurance policy in full to a charitable organisation approved under section 12 (h) of the Income tax act and the charitable organisation has been designated the beneficiary of the policy. Then under these guidelines, the surrender value and the premium may be deducted for the purpose of ascertaining chargeable income or statutory income.

Where an existing policy has been assigned, the surrender value on assignment may be deducted as a charitable donation restricted to one-twentieth of the contributor’s statutory income. Subsequent payment of premiums in respect of existing or new policies would also be awarded the same treatment. Where the premiums and or initial surrender value has been allowed, no additional amount will be allowed on maturity of the policy”.

To summarise, when you irrevocably assign an existing life insurance policy to a charity the amount of the donation you make to it generally corresponds to the policy surrender value. The charity will then issue you a tax receipt entitling you to a tax credit for the year in which you make the donation. If you choose to continue paying the policy premiums you will receive an annual tax credit for the premiums paid subject to one-twentieth of statutory income.

If you, however, purchase a new life insurance policy, it comprises no surrender value at the time of purchase, and only the premiums that you will pay entitle you to a tax credit. In such a case:

* At the charity’s request and with its written consent you pay the premium to the insurer which will then issue you a receipt. These receipts must be presented when making your claims for tax credits.

Upon your death, the principal insured under the insurance policy will be paid to the charity as a beneficiary. No receipt entitling you to a tax credit will be issued in your name or in the name of your estate, since you will have already received a tax credit on the premiums paid each year.

What benefits are there to be derived from introducing this concept?

To the Donor

a) Significant Tax Savings

Well, let’s see how this might work. Let’s assume that a client pays $100,000 for insurance premiums for coverage of $1,000,000. Within that year he/she then decides to give that policy to charity. So that upon his/her death, that charitable institution would receive the $1,000,000 sum assured. The policy can then be removed from the client’s taxable estate and the premium payments of $100,000 could then be deducted, subject to the limitations of the income tax act.

b) No Gift Tax

Under normal circumstances, when transferring gifts to loved ones, a transfer tax of four per cent is applicable to your estate at current market value. However, because the gift you would be leaving for the charitable organisation would be given to them as beneficiaries on a life insurance policy, you would not be required to pay the four per cent transfer tax, hence no gift tax.

c) Recognition

Most charities will list the client as the donor of the amount of the death benefit, but the client only pays the life insurance premiums. Some charities may even give plaques and scholarships in honour of the donor.

d) Donors Can Make Larger Gifts without Making a Major Cash Outlay upfront.

As stated earlier the only cash outlay required by the client is his/her commitment to the paying of life insurance premiums. However, upon his/her death the charitable organisation will receive the life insurance proceeds and cash value (if any); which in many circumstances constitutes as a major cash outlay.

To the Charities

Charities May Receive Larger Donations Than They Would Otherwise Receive.

* It ensures a stream of cash over the years as plans mature or paid out at different times.

* Cash values/equity can be utilised before policy matures or before death of the donor.

To Insurance Companies

Less policy surrenders: Some one may no longer want his/her policy because of any of these reasons:

* Original reason for purchasing the policy is no longer there

* Beneficiaries are deceased

* Another investment would make more sense at this time

* A reduction in estate size or a change in the tax laws

* The premiums are no longer affordable (here only the cash surrender Value of the policy are donated)

So before surrendering their insurance policies, clients may be encouraged to donate them to charity and receive a tax credit.

Increased Sales: With the idea being marketed heavily amongst the charities to their donors and members. It will provide an opening for insurance advisors to sell more policies.

Not everyone will want to donate their policy to charity, but for those who may wish to do so this added incentive may make it easier for them to donate more. This is in fact, welcomed news for the charities.

Denver Brown is an executive business coach and financial services specialist. He can be reached at denverbrown84@yahoo.com or at 577-6087