Charitable Gifting with Shared Ownership Universal Life Insurance

Many individuals have realized their charitable aspirations by donating a life insurance policy to the charity of their choice.  In situations where that donation is a Universal Life policy, the use of a Shared Ownership strategy could prove to be a viable investment for the donor.

Shared Ownership refers to an arrangement involving cash value life insurance policies such as Universal Life.  Universal Life combines life insurance with an investment fund which grows tax deferred until the cash value is withdrawn.  If the cash value is paid out at death, the growth is tax free.

Under Shared Ownership, the life insurance and the cash value would have different owners and beneficiaries and would be structured as follows:

• The owner and beneficiary of the death benefit of the life insurance would be the charity.
• The owner of the investment portion would be the donor and the beneficiary would be his or her spouse of other family members.
• The donor would pay the cost of insurance on behalf of the charity and receive the donation receipt
• Any investment deposits to the policy would grow tax sheltered for the benefit of the donor and his or her family.

Case Study

John is a 45 year old business owner who wishes to leave $1,000,000 at his death to his favourite charity.  He arranges for the charity to purchase a $1,000,000 Universal Life policy on his life.  John pays the annual premium on behalf of the charity ($11,724) and receives the charitable donation receipt.

As a result of a Shared Ownership Agreement between John and the charity, John owns the investment account of the Universal Life policy and deposits $10,000 per year for 10 years.  His wife is beneficiary of the investment portion of the policy should he die. This deposit is in addition to the $11,724 cost of the insurance that he pays on behalf of the charity.

The cash value portion of the policy grows tax deferred, and if the cash value is paid out as a consequence of John’s death that growth is received by his beneficiary tax-free.  If we assume that the investment account of the policy earns 5% per year and we compare that to an alternative investment earning 3% after tax (comparable to 5% before tax), the results are as follows:

With Shared Ownership, it is possible for both the charity and the donor to benefit.  The unique tax advantages and flexible design of a Universal Life policy make this an ideal vehicle for this strategy.

Give me a call if you think this strategy will work for you.  As always, please feel free to share this information with anyone you think will benefit from it.

* If John withdraws from the Universal Life policy while he is living he may be subject to tax.  He does, however, have a much larger fund to borrow against than he would under the alternative investment fund.  Should John die, his wife would receive the full amount of the investment fund tax free. 

Universal Life example illustrates Sun Life Universal Life II for a male age 45 non-smoker level cost of insurance with additional deposits of $10,000 per year for the first 10 years, projected at 5% for life.