In addition to a guide for donors and another for charities, the Canadian Association of Gift Planners (CAGP) has come up with two new guides for those in the industry who facilitate the donation of life insurance policies as part of the planning they do for clients: the Charitable Donations of Life Insurance Guidelines for Canadian Advisors and the Charitable Donations of Life Insurance Guidelines for Canadian Insurers.

The guidelines are part of a series of information resources from the CAGP “intended to provide straightforward guidance and direction to fundraisers, professional advisors, donors and insurers when creating and facilitating charitable donations using life insurance,” the CAGP writes in its introduction to the seven-part series. The information resources were developed in response to one regulator’s suggestion that interested parties develop best practices to ensure appropriate processes and measures are followed when making use of insurance products for charitable donation purposes.

Regulatory concern

“One of the driving factors in the creation of this toolkit was provincial insurance regulatory concern around the trafficking of life insurance policies, in particular, Stranger-Owned Life Insurance (STOLI) and viatical or life settlements,” the CAGP writes in its guidelines for advisors. They also add that charities may be accepting gifts of life insurance to facilitate large donations without appropriate plans to keep the insurance in effect. “If an advisor were to participate in such a transfer, knowingly or unknowingly, it could result in compliance risks to their practice,” they add.

The guide for Canadian charities, meanwhile, is more pointed in explaining the risks to the broader sector: “Please consider your impact on the sector as a whole,” the CAGP writes. “Recent history has shown that organizations which take a more aggressive approach to soliciting and acquiring gifts of life insurance may attract unwanted regulatory attention which can affect the entire sector. Should your organization take a more aggressive approach than recommended in these best practices, please take into consideration the impact to the sector as a whole.”

CAGP’s president and CEO, Ruth MacKenzie, adds that the entire sector could end up with restrictions of gifts if a small number of organizations are found to violate regulations. “We certainly saw this in the initial response from the BCFSA,” she says. “Regulators are rightly concerned about consumer protection and, as the B.C. situation showed, regulators won’t hesitate to act in broad terms if they feel it is necessary.”

Guidelines for advisors

The 16-point checklist of advisor due diligence provided by the CAGP includes the following advice:

  • Advisors should obtain complete financial information from the donor to ensure the policy donation is appropriate under their circumstances. An advisor should be concerned if the donation will adversely affect any estate planning or the security of the donor’s surviving family.
  • Advisors should strongly recommend, in writing, that the donor discuss their desire to purchase or transfer an insurance policy with their tax advisors.
  • Advisors should be prepared to show options. Permanent, short pay polices are generally preferred by charities. Provide detailed illustrations for new contracts or for those that would be transferred.
  • Ask the charity if they have a gift acceptance policy that references insurance gifts.
  • Function as an advisor to both the donor and the charity. “It is critical that there is direct interaction between the donor and the charity,” the CAGP writes.
  • Provide the names of at least two independent valuators if a Fair Market Valuation (FMV) of the policy is required. (“The advisors should not be expected, nor offer, to cover the fee for the fair market valuation. This is usually an expense to the donor, however there may be situations where the charity will pay for this cost.”)

The guide also discusses the additional tax considerations that may be involved when corporate-owned polices are used, the forms required to transfer a contract, conflicts of interest, and the duty of care an advisor owes to the owner of the charitable insurance policy, as the charity becomes the owner once the policy is transferred.

“The advisor should understand that participating in the transfer of an insurance policy where there is no clear relationship between the charity and the donor as outlined, may involve significantly higher risk of regulatory scrutiny than a donation which meets these criteria,” the guidelines’ authors write.

Guidelines for insurers

For Canadian insurers, meanwhile, their specific guide includes advice for use when evaluating the transfer of an insurance policy to a Canadian charity or in the setup of a new policy which is to be owned by a Canadian charity. “These guidelines are designed to help insurers and advisors to keep a compliant practice, and to ensure that there is a public set of standards and guidelines to help you interact in a positive way with charities,” the CAGP writes.

Red flags

Red flags identified by the CAGP include when a donor has no relationship with the charity and no clear philanthropic intent. An outsized death benefit relative the donor’s financial situation, or the charity’s financial situation may be another cause for concern. Under “yellow flags” the association says a term policy, other than a term to 100 policy, would be unusual for a charity to accept unless there was a plan in place to exercise conversion options.

Additionally, they say an insurer underwriting a policy for charitable ownership will have some different considerations to take into account than would be considered if the insurer were underwriting a for-profit, corporately-owned policy: A donor’s personal needs should be met first and there should be an insurable interest in the life to be insured. “This will require the applicant to provide sufficient evidence of both a connection to the proposed insured and that the charity has a pecuniary interest in the life of the insured. Assuming the insurable interest is established, the amount of insurance being applied for must then be reasonable.”

Insurers, they add, will need to review the specific situation and all of the facts in totality, on a case-by-case basis, to determine if the pecuniary interest is established. “A simple stated desire to make a donation will likely not be enough.”