Charitable Life Insurance Evaluation Guidelines€¦ · 3/5/2017 · These Charitable Life Insurance Evaluation Guidelines are provided as a guide to the charitable gift planner

Charitable Life Insurance

PPP Resource

A publication of all rights reserved.

Evaluation Guidelines

The Insurance Gift Guidelines Task Force included members with various gift planning specializations and expertise with charitable gifts of insurance.

1© National Committee on Planned Giving® 2005—All rights reserved.

CHARITABLE LIFE INSURANCE

EVALUATION GUIDELINES

Printed in the United States of America by the National Committee on Planned Giving233 McCrea Street, Suite 400 • Indianapolis, IN 46225

Phone: 317-269-6274 • Fax: 317-269-6272 • E-mail: [email protected] • Web Site: www.ncpg.org

This publication is designed to provide accurate and authoritative information in regard to the subjectmatter covered. It is provided with the understanding that the publisher is not engaged in renderinglegal, accounting or other professional services. If legal advice or other professional assistance is required,the services of a competent professional person should be sought.

From a Declaration of Principles jointly adopted by a committee of theAmerican Bar Association and a committee of Publishers and Associations.

A TOOL FOR CHARITABLE GIFT

PLANNERS


2 © National Committee on Planned Giving® 2005—All rights reserved.

PrefaceAlchemy was a medieval practice that relied onelixirs, mysterious incantations and strange rituals tocure ills, prolong life, and, most famously, transformbase metals into gold. Life insurance is sometimespromoted as a modern alchemist’s tool because ofits ability to provide significant cash payments and toallow the accumulation of wealth. So too, in someinstances, has planned giving been touted as analchemy of sorts, giving the appearance ofgenerating substantial benefits for the donor, beyondthe mere retention of an income interest whilefulfilling a charitable goal.

Perhaps it is inevitable, then, that life insurance andplanned giving should regularly find commonintersections.

Sometimes these intersections have been beneficial.Generous outright contributions of life insurancepolicies have provided significant financial supportfor charitable causes. And life insurance hasfrequently provided the wealth replacementcomponent that made a gift plan possible for thedonor and his or her family. On other occasions, theresults have been less positive, as was the case withcertain split dollar plans promoted in the 1990s.

Charitable gift planners owe it to their donors,clients, and charitable institutions to understand theworkings of charitable gift plans and to be willing toobjectively explore new and innovative proposals.However, considerable time, effort, and resourceswould be wasted pursing each and every possibility.

The successful gift planner will rely on the ModelStandards of Practice for the Charitable Gift Planneras the foundation for any review and evaluation of agift proposal, including those involving novelapplications of life insurance. The Model Standardsare reproduced in Appendix 5. Three of thestandards (I, III, and X) are key when consideringcharitable life insurance proposals:

Philanthropic Motivation – The principal basisfor making a charitable gift should be a desireon the part of the donor to support the work ofcharitable institutions.

Disclosure – The role and relationships of allparties involved should be fully disclosed to thedonor and no party should act or purport to actas a representative of any charity without theexpress knowledge and approval of the charity.

Public Trust – Gift Planners shall act with fairness,honesty, integrity and openness and, except forcompensation for services which has beendisclosed to the donor, shall have no vestedinterest that could result in personal gain.

These Charitable Life Insurance EvaluationGuidelines are provided as a guide to the charitablegift planner. Recognizing the wide array ofcircumstances and conditions under which lifeinsurance may be applied to charitable giving, noattempt is made to unconditionally affirm—orcondemn—life insurance in charitable giving. Evenanswering all of the questions posed by theseCharitable Life Insurance Evaluation Guidelines willnot produce a simple yes or no answer.

Ultimately, each proposal for an application of lifeinsurance to charitable giving will have to be judgedon its own merits to determine, first and foremost,whether or not the proposal will produce value forthe charity and assist the donor in the achievementof his or her charitable objectives. If a proposal orprogram fails to meet these two criteria, then it failsto qualify as a charitable gift plan.



Acknowledgements ContentsIntroduction .............................................. 4Definitions ................................................. 6Guiding Principles....................................... 7Threshold Questions .................................. 8Organizational Considerations ................... 9Economic Analysis ................................... 13

Investor versus Charity Funded ................13Net Present Value Analysis .......................14Valuation Example ..................................14

Financial Analysis .................................... 16Outright Contribution of Policy ..................16Premium Financed Plans ..........................19Premium Arbitrage Plans .........................19Commissions ..........................................19Financial Soundness ...............................20Charity’s Obligations ...............................20Collateral ...............................................20Stress Test ............................................20

Structural and Risk Analysis ................... 21Insurable Interest ...................................21Private Benefit Payments ..........................21Insurance Capacity ..................................21Viability of the Companies ........................22

Appendix 1: Glossary .................................23Appendix 2: Understanding the

Limitations of Policy Illustrations ...............24Appendix 3: Evaluation Checklist .................25Appendix 4: Quick-Start Questions...............28Appendix 5: Model Standards of Practice

for the Charitable Gift Planner ..................29

NCPG would like to acknowledge the time and effortinvested by members of the Insurance GiftsGuidelines Task Force, and by many charitable giftplanners, donor advisors and representatives of theinsurance industry who reviewed and refined theguidelines throughout the drafting process.

Task Force Members:Craig Wruck, ChairCharles GordyRobert LewReine ShiffmanTanya Howe Johnson, Ex-Officio

Of Counsel:Jane Peebles

Editor: Barbara Yeager



IntroductionLife insurance is a valuable tool in many financialand estate planning applications. In addition, manyprograms have been developed over the years toapply life insurance to charitable giving. Some, suchas the charitable reverse split dollar programspromoted in the 1990s, have been discredited andsubject to significant regulation while others, suchas the outright contribution of existing policies or thecombination of wealth replacement insurance with acontribution to a charitable remainder trust, havestood the test of time and have proven to be asignificant source of value for charitableorganizations.

Charitable gift planners are frequently approachedwith offers of creative applications of life insurancein regard to charitable gift planning. Some of theseproposals involve new or innovative uses of lifeinsurance products while others are merely novelmarketing approaches for traditional applications. Ingeneral, charitable life insurance programs areaggressively marketed, often with sales promotionsthat are aimed at board members and other highlevel officials within the charitable organization.

Some of these proposals provide real economicvalue for the charitable beneficiary and advantagesfor the donor, while others seem to be designedprimarily to enrich the promoters involved.Frequently, these marketing approaches areaccompanied by voluminous, but not necessarilyilluminating, financial illustrations which can make itdifficult to compare alternatives and to evaluate thepotential value to the charitable organization.

Charitable gift planners and donor advisors struggleto analyze these offerings and to navigate throughthe many and sometimes conflicting claims in orderto advise charities, donors and clients. The NationalCommittee on Planned Giving (NCPG) has issuedthese Charitable Life Insurance Evaluation Guidelinesas a tool to assist charitable gift planners in theanalysis and evaluation of charitable life insuranceproposals.

These guidelines do not purport to judge anyspecific proposal or type of program; rather, theyare designed as an analytical tool that will:

be useful in the analysis of charitable lifeinsurance proposals;

provide a methodology to reveal the overallvalue of such plans for the charitableorganization;

suggest a framework to analyze theprojected economic value created for thecharitable beneficiary;

assist charities and donor advisors inevaluating the legal and ethical ramificationsof charitable life insurance plans that mightplace a charitable organization or donor injeopardy.



Methodology

Responsible gift planners should conduct a carefulanalysis before engaging in any charitable lifeinsurance program. Since a complete analysis canrepresent a significant investment of time andeffort, these Charitable Life Insurance EvaluationGuidelines propose a stepped analysis, leadingfrom broad and qualitative inquiries throughprogressively more specific and quantitativeanalysis, in order to allow the gift planner toeffectively triage his or her efforts. If a proposalcannot meet the broad requirements, there may beno need to engage in the more exacting and time-consuming steps in the analysis.

The guidelines are divided into the followingsections:

Guiding Principles – an outline of principles toguide the analysis of a proposed charitable giftplan

Threshold Questions – a set of keyconsiderations that should be examined beforebeginning the step-by-step analysis of aproposed charitable life insurance program

Meeting Organizational Priorities – a subjectiveexamination of how closely the proposal fits theneeds of the charitable organization

Economic Analysis – an estimate of the actualvalue of the proposed program to thecharitable organization

Financial Analysis – identifying and understandinghow the values flow within the program

Structural and Risk Analysis – analyzing thespecific components and structure of theprogram and the soundness of the providers

1 Joseph Belth, Life Insurance, A Consumer’sHandbook, Bloomington: Indiana University Press,1985.

Approach

Unfortunately, a common sentiment towarddiscussions regarding life insurance is summarizedby the following observation:

Ignorance, complexity, and apathy are the threewords that best characterize the market forindividual life insurance. In this kind ofatmosphere, opportunities for the exploitation ofconsumers abound.”1

Gift planners can be tempted to spurn all lifeinsurance proposals without devoting the time andeffort to examine each proposal to determine whatvalue it might bring to the charitable organization.

When choosing an insurance policy to protect yourown personal financial well-being, you would, ofcourse, resist being pressured to make a decision.Instead, you would carefully weigh your personalneeds compared to the program being offered,considering your priorities and your financial goalsand whether this is the most efficient way to achievethem. You would conduct due diligence to ensurethat the promoter was reliable, that the productbeing touted was legitimate, and that any risks didnot outweigh the potential benefits.

You should apply that same level of analysis, andcaution, before entering into a life insuranceprogram on behalf of your charitable organization.The sections that follow suggest a stepped analysisthat leads to progressively deeper review ofcharitable life insurance program proposals. Seldomwill there be one question or one measure thatdisqualifies—or qualifies—a specific program.However, in the aggregate, the answers to thesequestions will, like a mosaic, create a picture thatwill help determine whether or not a specificcharitable life insurance program is likely to createreal value for your organization, or if you would bebetter off devoting your efforts elsewhere.



DefinitionsAt the outset, it is important to establish the rolesand functions of the entities involved in charitablelife insurance programs. In some cases, thesedefinitions differ from those used in ordinary non-charitable applications. Although Appendix 1contains a more complete glossary, the followingterms and definitions are key, and will be usedconsistently throughout these Charitable LifeInsurance Evaluation Guidelines:

Insured – the individual upon whose life a policy orannuity is issued.

Insurer – the insurance company that issues thepolicy or annuity.

Owner – the individual or entity that owns thepolicy.

Policy – a contract issued by an insurer thatpromises to pay a death benefit to the beneficiaryupon the death of the insured.

Annuity – a contract issued by an insurer thatpromises to periodically pay an amount to abeneficiary (the amount of the annuity can be fixedor variable and continue for the lifetime or last for ashorter period according to the terms of thecontract).

Death benefit – the amount paid upon the death ofthe insured (the amount of the death benefit can beguaranteed and fixed at the time the policy is issuedor it can vary according to the terms of the contract;the net amount available may be reduced by loansor withdrawals made before the death of theinsured).

Beneficiary – the individual or entity to whom thedeath benefit or periodic annuity is to be paid.

Premium – the amount paid to the insurer inexchange for the contractual promises (insurancepolicies usually require periodic payment ofpremiums during the lifetime of the insured;annuities usually require a single premium paymentpaid when the contract is issued).

Many charitable life insurance programs arevariations on one of two basic concepts:

Premium Financed Plans – These programs aretypically presented as a package consisting of a pre-arranged loan (or other debt facility) that providesthe charity with funds to purchase a number of lifeinsurance policies on the lives of a group of donorsor other constituents. Such programs rely upon theassumption that a sufficient number of the insuredwill die as expected based upon an actuarialprediction, in order to ensure that the death benefitscollected will be enough to retire the debt andcontinue to provide future premium payments. Afterall of the insureds have died, the charity is projectedto be left with a significant amount of money oreconomic benefit despite having invested little, orsometimes no, cash over the course of the program.

Premium Arbitrage Plans – These programs areoften promoted as a sophisticated investment optionrather than as a charitable contribution program.The plans involve either an expenditure of thecharitable organization’s own funds or the use ofborrowed or other funds provided by outsideinvestors to purchase both an annuity contract and alife insurance policy on the same individual, usuallyfrom different insurers. Often the individual to beinsured must meet certain specified health and agecriteria in order to secure favorable premiumpricing.

The promoters maintain that under these conditionsthey can obtain an annuity that pays enough to coverthe premium amount for the life insurance and theinterest on the loan (if any) and still provide acurrent return to either the investors or thecharitable organization for as long as the insuredlives. When the insured dies, the death benefit ofthe life insurance provides a guaranteed return ofprincipal to the investors or is used by the charity torepay either the loan or its endowment for theamount that was spent for the annuity contract. (Incases where an outside investor must first berepaid, the charity receives only what is left afterthis obligation is satisfied.)



Guiding PrinciplesThe following key principles are the philosophicalunderpinning for these Charitable Life InsuranceEvaluation Guidelines, and are useful in the analysisof any charitable gift proposal, especially aproposed charitable life insurance program.

Complete Analysis – Careful analysis of both thesubjective and objective factors is key. Someaspects of charitable life insurance programslend themselves to quantitative analysis, whileother aspects are more qualitative in nature. Aworthwhile charitable life insurance programwill meet both subjective and objective criteria.

Value and Values – The analysis should guardboth the value and the values of the charitableorganization today and in the future. Eventhough a charitable life insurance program maybe financially viable, it may present unwarrantedrisk to reputation and/or consume unreasonableamounts of valuable staff time and resources.

Time to Decide – The charitable organizationshould not be pressured into a decision, nomatter how appealing the proposal. Charitablelife insurance programs typically run for manyyears, sometimes multiple lifetimes. Charitableorganizations should devote sufficient time andeffort to ensure that the charitable life insuranceprogram will provide real value to the charitableorganization and is supported by its leadershipand its constituents.

Nothing is Free – Nothing of value comes without aprice. All of the costs of the charitable lifeinsurance program, including the costs ofinsurance, borrowing, commissions, and on-going administration, must be paid by someoneat some point. The charity should have a clearunderstanding of all costs and the sources of thefunds to pay these expenses, as well as theultimate source of the value the charitableorganization expects to receive.

Charitable Interest – The charitable life insuranceprogram must respect and serve the charitableinterests of the donor.

Obligations and Commitments – Charitableorganizations should fully understand the costsinvolved in a proposed charitable life insuranceprogram and the impact on those costs shouldthe program not unfold as planned. Interestrates, mortality assumptions, and the cost ofinsurance are all variables that may increase ordecrease the charity’s out-of-pocket expensesover time.



Before beginning a careful analysis of the details ofa charitable life insurance program, first consider anumber of threshold questions. These tend to besubjective in nature and the answers may bequalitative or “gut reactions.” The questions willnot likely provide a clear go or no-go decision.However, they may suggest caution, or perhapsadditional inquiries that should be made beforesignificant time and effort is devoted to analyzingthe financial and technical details of the proposedcharitable life insurance program.

What was your initial reaction? – If you foundyourself feeling that the program sounds toogood to be true or may not be legal or ethical,you may be right. Before your brain gotinvolved, did your gut tell you that somethingmay be wrong? Don’t get caught up in theinitial sales pitch.

Do you feel that the program will work? –Don’t check the numbers or research theInternal Revenue Code yet. Just ask yourselfwhether or not the program seems viable andmakes sense. Do you believe that thisprogram, if all goes as planned, will work?

How does the value flow through theprogram? Is it logical? – “Follow themoney,” is still good advice. It should flow frompoint to point, much like water flowing down ariver. It should never move upstream unlessthere is a reason—which might prove to be asubmerged rock creating an eddy! If a donor

ThresholdQuestions

intends to flow money to his or her favoritecharity, it shouldn’t flow backwards without agood reason.

How do you feel regulators and othergovernment officials will react? – How willthe IRS react to a deduction that might betaken? How will your State Attorney Generalview this activity and the decision of your boardof directors–as a charitable contribution or as aform of business relationship with the donor?How will your State Insurance Commissionerreact to your charity insuring the life of a donor?

Does the program make economic sense forthe donor? – Will the donor receive a benefitfrom the program and is that benefit what thedonor expects?

Does the program make economic sense foryour charitable organization? – Will yourorganization receive a value that will exceedyour time and effort? Will the long termeconomic gain exceed the potential long termcost?

Does the program cultivate true “donors” orsimply individuals willing to be insured? – Isthe program likely to generate new prospectivedonors? What will the impact be on your currentdonors?



Does the proposed program fit the needs andpriorities of the charitable organization? Whenpurchasing life insurance for your own personalneeds, you would approach the decision thoughtfullyand cautiously, and you might wonder who wouldbenefit most from your purchase of the policy.Before going very far at all, you would make certainthat you actually need the protection and valueprovided by the insurance product. You would look tothe facts for answers, but you would also rely onyour knowledge and intuition about your owncircumstances and needs.

Many charities have welcomed and promotedcontributions of life insurance. The proceeds fromlife insurance policies have helped charitableorganizations carry out their charitable purposes,often in ways that would otherwise not have beenpossible. Outright contributions of existing or newpolicies, and the use of life insurance as a wealthreplacement strategy in planned giving arecommonly used.

These traditional uses of life insurance in charitablegiving require little additional effort or commitmentfrom the charitable organization. However, thedecision to promote a charitable life insuranceprogram as a source of contributions must becarefully scrutinized. The need to identify, cultivateand solicit participants, and then steward thoserelationships for many years, as well as manageand monitor the program, all require a long termcommitment of staff and program resources.

OrganizationalConsiderations

Supporting Organizational Priorities

Consider three different charitable organizationswith different needs that might be met by acharitable life insurance program designed tobenefit the charity:

Organization A – was recently notified that itsService Center has been condemned as a result ofa termite infestation. It must quickly secure funds tobuild a new facility.

Organization B – has just launched an endowmentcampaign with the goal of securing $18 million forits endowment within the next five years.

Organization C – is a financially sound charity thathopes to preserve its ability to serve the communityfor many years to come.

Although it may be tempted by the potential for longterm benefit, Organization A should carefully weighits need to secure funds for immediate use againstthe risk of diverting staff attention for the potentialof a future benefit. The decision to participate in acharitable life insurance program should be guidedby its pressing need for current, rather thandeferred, funding.

Similarly, Organization B hopes to have anendowment of $18 million in five years. It too needsto concentrate on those activities that will providemore immediate revenue than the charitable lifeinsurance program.

However, Organization C may determine that thecharitable life insurance program is in line with itspriorities. Still, Organization C will need to exploreother factors that may influence its decision toparticipate.

Efficient Use of Resources

Although a traditional program simply promotingcontributions of life insurance policies is reasonablyeasy to administer, a charitable organization mustrecognize that a more complex charitable lifeinsurance program can require considerable staffenergy, resources, and attention. Consequently, itneeds to decide whether the assignment of staff tothe proposed charitable life insurance program isthe most cost-efficient way to meet its fundingpriorities or whether participation in the charitablelife insurance program will divert effort andresources from fundraising activities that are moreconducive to the organization’s objectives.



Debt Financing

The question is not whether the charitableorganization has the right to borrow funds, butwhether it should it borrow money for this particularpurpose. There are many good reasons for acharitable organization to borrow funds. Forexample, loans are often used to allow organizationsto alleviate cash flow problems, meet capitalprojects, or purchase equipment. However, aresponsible charitable organization should carefullyconsider the decision to go into debt for the purposeof purchasing insurance.

Several factors should be weighed in the decision toborrow to pay insurance premiums:

Will the new debt limit or preclude thecharitable organization from borrowing funds inan emergency situation? Will it limit or precludethe organization from borrowing funds tosupport projects requiring immediate financing?

As a result of the new debt, what constraintswill the organization face? When will cash beginflowing and how will debt service be covered inthe meantime?

What is the probability that the anticipatedproceeds from the insurance death benefit(s)will not be received when expected?

Although investment earnings are tax-exemptfor a charitable organization, borrowing funds togenerate interest can lead to Unrelated BusinessTaxable Income (UBTI). Thus, the charitableorganization could also subject itself to taxableincome on some of the proceeds from thecharitable life insurance program.

There may be securities ramifications. TheSecurities and Exchange Commission (SEC)regulates investment transactions that involvelarger numbers of individuals. This is particularlyrelevant if the charitable life insurance programinvolves borrowing funds. If a large number ofindividual lenders becomes involved, it ispossible that the SEC may review the process.2

Some charitable organizations will be guided bytheir investment policies. Does board policy permitindebtedness? If so, are there restrictions that wouldlimit your organization’s consideration of a loan forthe purpose of paying insurance premiums?

Donor Diversion

Some charitable life insurance programs tout theability to provide donors with the opportunity tosupport the organization without making a monetarycontribution. While this may be an alluring option,prior to soliciting a pool of potential prospects, youshould carefully consider whether there are those inthe prospect pool who may conclude that this is their“contribution” and reduce other gifts as a result oftheir involvement in the charitable life insuranceprogram. Staff time may be better used to identifyand cultivate prospects for immediate and moresubstantial contributions.

Non-disclosure Agreements

A non-disclosure agreement, as its name implies, isusually a legal contract in which the signer agreesnot to disclose certain information, except underterms as described in the agreement. Common inthe scientific industry, non-disclosure agreementsare becoming widely used in the financial servicesfield by those who hope to maintain a competitiveadvantage by claiming a proprietary interest incertain features of a particular charitable lifeinsurance program.

Sometimes these agreements can seriouslyhandicap the charitable organization, and canprevent you from sharing the details of thecharitable life insurance program with your trustedadvisors. Furthermore, by agreeing to preservesecrecy about a proposed charitable life insuranceplan, you may open your organization to legalliability even if you choose not to participate in theplan. For example, if you sign a confidentialityagreement and then decide not to participate withthat particular promoter but later choose a proposalfrom a competing promoter, the first promoter mightaccuse you of violating the initial non-disclosureagreement.1

Your best protection is to secure the advice of yourown counsel prior to signing any confidentiality ornon-disclosure agreement, especially in light of thefact that state laws vary widely regarding the validityand enforceability of non-disclosure agreements.



already affiliated with the organization and newparticipants, legal and ethical ramifications canarise.

In addition to the issues raised by state insurableinterest statutes (see page 21), ethicalconsiderations may affect both the organization andthe individual to be insured. The organization,especially the governing board, should fully discussand evaluate the potential consequences of involvingunknown individuals in the purchase of life insuranceon your constituents before proceeding. Consider:

Marketing expert Regis McKenna reminds usthat it’s not so much what you say about yourorganization, it’s what your donors andprospects say about you.4 Perhaps the best testis the age-old “headline” analogy. Ask yourself:What will your constituents say if they read anarticle describing your involvement in theprogram? Boston University was the subject ofpublic outrage in 1989 after the Boston Globereported that the University planned to raisemoney by taking out insurance policies on BUstudents.5

A secondary market is developing for charitablelife insurance programs, which allows theoriginal lenders or investors to sell their stakesin the program. Will your constituents, whomyou invited to participate, be aware of theinvolvement of new parties and their interest inyour constituents’ lives? If not, should they beadvised of this situation? And when they becomeaware of it, will they be comfortable withunknown individuals having a financial stake intheir life expectancy? (NOTE: As this report goesto press, Federal legislation has been proposedwhich would significantly diminish the appeal ofcharitable life insurance programs as aninvestment.)The promoters will have gained access tofinancial and contact information on thoseconstituents who choose to participate and oftenon those who do not choose to participate. Isthis appropriate?As discussed more completely later in thisdocument, there is a limit to the amount of lifeinsurance that insurers will issue on any givenlife. Is it ethical to ask a donor to participate in aplan that might restrict or prevent him or herfrom acquiring additional insurance coverage forpersonal or other planning needs in the future?

Full Disclosure

If you were approached on the street by a strangerwho offered to sell you shares of stock in anundisclosed company, you would never consent tothe investment without first demanding more details.Similarly, you have a duty to obtain the facts prior toentering into any agreement on behalf of yourorganization.

It is your right and obligation to know therelationships of the parties involved in the charitablelife insurance program and to understand how,under what circumstances, and how much each iscompensated and the value each adds to theprogram in return for his or her compensation.Appendix III provides a checklist with questions thatmay be useful as you try to understand theserelationships. These questions are meant to serveas a guide; your advisors may recommendadditional areas of inquiry.

Nonprofit Status

As a matter of public policy, charitable organizationsare afforded tax-exempt status when the InternalRevenue Service (IRS) determines that theorganization exists primarily to serve charitablepurposes. In his article Charities and Insurance, TheNext Big Thing, Larry Bell reminds readers that theIRS did not intend that charitable organizations beused to fill the pockets of for-profit professionals,and that if the IRS believes the organization is moreintent on generating commissions or fees to thepromoters rather than meeting its exempt purposes,the organization could jeopardize its 501(c)(3)status.3 While this is certainly a worst casescenario, nonetheless it is one that must beseriously considered, especially in light of therecently increased interest of Congress in theactivities of charitable organizations.

Ethical Concerns

Many charitable life insurance plans are built on theassumption that the charitable organization willprocure large pools of participants willing to beinsured. Usually, but not always, the charity isencouraged to seek participants from those whohave an existing relationship with the charity. Whenconsidering the solicitation of individuals, both those



1 IPWatchdog.com, copyright 2003-20042 Steve Leimberg, Estate Planning Newsletter #671.

An excellent examination of the risks andramifications of this particular area. SteveLeimberg’s Estate Planning Newsletter can beaccessed at www.leimbergservices.com

3 Steve Leimberg, op. cit.4 Regis McKenna, Relationship Marketing, Addison-

Wesley Publishing, 1991.5 Boston Globe, April 20,1989.

Experience of Others

Finally, before deciding to participate in a charitablelife insurance program, be sure to obtainrecommendations directly from other participants.How many other charities are working with thepromoter? Call some of them and inquire about theirsuccesses, any problems they have encountered,ease of communication, and whether the program isworking as they had expected. Do backgroundchecks. What do you know about the company, theagents, and other involved parties? Consult withcolleagues through NCPG’s e-mail discussion group,GIFT-PL, or other national forums, the BetterBusiness Bureau and, certainly, the nationalinsurance associations.



Ultimately, how much value will this program bringto your organization?

A charitable organization should consider a numberof economic factors before obtaining an insurancepolicy on the life of an individual. Key among them isa careful analysis and projection of the ultimateeconomic benefit to the charitable organization, andhow much charitable work that economic benefitwill allow the organization to accomplish. Analysis ofthe economic benefit raises several questions:

What is the present value of the projectedfuture death benefit payment to the charitableorganization?

How is the present value determined?

Are assumptions used in the projectionsreasonable?

What is the probability of receiving the deathbenefit payment when it is projected?

What is the present value of the requiredexpenditures during the projected lifetime of thecharitable life insurance program?

Are there circumstances that might requireadditional payments or contributions to achievethe projected economic value?

What will be the impact if the insured liveslonger than expected?

Economic Analysis

What are the economic risks involved (e.g.,If interest rates change, how will the valueto the charity be affected?)

Investor versus Charity Funded

There are two basic funding models for charitablelife insurance programs. The flow of economic valueas well as the risk differs, depending upon themethod of financing used:

Investors provide initial funding – Theseprograms involve one or more outside investorswho provide the funding to make the initial andsometimes the ongoing payments for theinsurance. Such programs generally provideeconomic benefit to the charitable organizationonly upon the death of the insured. Should theinsured live longer than expected, the charitywill receive the death benefit later thananticipated and, of course, if the insured diessooner than expected the charity receives itsbenefit sooner. In either case, the valueultimately received by the charity is unlikely tobe precisely the amount projected.

The timing of this economic benefit is generallyno different than if the insured had purchasedan insurance policy and named the charity asthe beneficiary. Charitable organizations mustunderstand that the timing of the receipt of thedeath benefit is uncertain, regardless of whatmay be represented in the program proposal.

Charity provides initial funding – In theseprograms, the charitable organization makesthe initial and sometimes the ongoing paymentsfor the insurance, either through borrowing orthe use of its own internal funds. Of course, thecharity also assumes the significant additionalrisk if the program does not perform, since it isthe charity’s funds that are invested. The timingof the death benefit, which is usually used torefund the initial expenditure by the charity, isuncertain, which can cause the charity’s fundsto be encumbered longer than anticipated.

In these programs, the charity may also enjoycertain economic benefits while the insured isalive, as well as the death benefit when theinsured dies. If the charity provides the initialfunding and is the owner of the policy, it mayhave the right to collect cash dividends, borrowagainst the policy, and make partial or completesurrenders of the policy.



Estimating the net present value of a charitable lifeinsurance program involves a number of keyassumptions, many of which are specific to theorganization. Three key assumptions are:

program life expectancy – In most cases fundswill not be available for charitable purposes untilthe end of one or more lifetimes. In order tocalculate the present value of the life insuranceprogram, an estimate must be made of thedate(s) at which funds will be available forcharitable purposes. In most premium financedprograms, a number of individuals are insuredand, depending upon the rate at which they die,net funds may begin to be available forcharitable purposes once enough individualshave died to provide death benefit receipts inexcess of the expenses of the program. Themost precise estimate of the timing ofavailability of charitable funds would involvecalculating the present value of the projecteddeath benefit for each of the participant’s lifeexpectancies based upon his or her age.However, for most purposes, an estimate basedupon the life expectancy of the youngest insuredmay be sufficient.

organizational cost rise rate – Since funds willnot be available for charitable purposes untilsome time in the future, an estimate must bemade of the effect of inflation over time. Themost accurate calculation will use an estimate ofthe rate at which the organization’s cost ofproviding its charitable services is expected toincrease. In many cases, the general inflationrate as reflected in the Consumer Price Indexmay be used if more precise measures are notavailable.

expenses – In most cases the organization willincur expenses in the stewardship of theparticipants throughout their lifetimes. Themarginal additional expense may be minimal ifthe participants are donors or other constituentsinvolved in the organization. If, however, theparticipants are unique to the insuranceprogram, the costs of maintaining these newrelationships might be more significant.

For example, assume an organization is consideringa premium financed charitable life insuranceprogram that envisions the recruitment of 100individuals who agree to be insured for the benefitof the charitable organization. The program isdesigned to be self financed and does not require

Some charitable life insurance programs use ahybrid mix of these two funding mechanisms. Asexplained more fully in the section on FinancialAnalysis, the charitable organization should fullyexplore and understand any collateral agreementsor encumbrance provisions that could make thecharity liable for portions of the financing undercertain circumstances.

Net Present Value Analysis

The methodology outlined in NCPG’s ValuationStandards for Charitable Planned Gifts should beused to conduct a present value analysis of theexpected expenses (outflows) over time and theanticipated economic benefit (the death benefitexpected to be received from the policy or policies)in the future.

The objective of the present value analysis is toprovide the charitable organization with someindication of:

the real value of the proposed charitable lifeinsurance program in terms of the amountof charitable activity that it is likely tosupport

the costs and benefits of the proposedprogram over time

the financial effectiveness of theorganization’s involvement in the program

In those charitable life insurance programs whereoutside investors provide the funding, the analysis isrelatively straightforward: the present value of theexpected death benefit(s) should be calculated, withappropriate discounting for the probability of lapseor failure of the program. The result is an indicationof the value, in today’s dollars, of the charitable lifeinsurance program to the charity and can be used tocompare the program with other fundraising efforts.

Valuation Example

The objective of the net present value calculation isto estimate the value, in today’s dollars, of thecharitable work that the proposed life insuranceprogram is likely to provide. This will enable theorganization to evaluate the impact the insuranceprogram will have on the organization’s charitablepurpose. The NCPG Valuation Standards provide aconceptual framework for the valuation of plannedgifts that is applicable to the evaluation of proposedcharitable life insurance programs.



Obviously, enormous amounts of time and effortcould be devoted to the construction of highlyprecise estimates of the net present value of such aprogram. In performing the net present valueanalysis, the organization will need to make trade-offs in order to produce a sufficiently accurateestimate without an inordinate expenditure ofresources.

Those programs that require investment orexpenditure by the charity of its own funds require amore complex analysis. In addition to calculating thepresent value of the death benefit(s), the analysisshould also account for the present value of allexpected expenditures by the charity over thelifetime of the program. A precise analysis will alsoinclude a further discounting factor to account forthe risk that the charity may lose some or all of itsinvestment in the program.

1 Although a full discussion of the actuarial scienceinvolved in estimating the life expectancy of agroup of individuals is beyond the scope of thispaper, two technical elements should be kept inmind when setting assumptions regarding thetiming of the availability of charitable funds. First,individual life expectancy estimates are usuallythe average expectancy, the point at which onehalf of all individuals of a given age are expectedto have died. Second, because life expectanciesare measures of probabilities, the life expectancyof a group is usually longer than the lifeexpectancy of the youngest individual in thegroup.

2 This estimate is only approximate in that itassumes that none of the funds are available untilthe last of those insured has died. A moreaccurate estimate would recognize and take intoaccount that funds are likely to become availablefor charitable purposes at various points over theduration of the program.

3 Since servicing expenses will decrease asparticipants die each year, the organization hasdecided to reduce by one half the expenseprojection. A more accurate estimate wouldcorrelate the estimated expenses with the lifeexpectancies of the individual participants.

direct expenditures of cash by the charitableorganization. According to the materials developedby the promoter, the charity will receive $10 milliontoward its endowment, after all of the participantshave died and all of the debt and other expenses ofthe program are paid.

First the organization must take several steps to setthe assumptions for its net present value calculation:

1. In order to determine the number of years untilthe program will be completed, the organizationmust make an assumption about the ages of theparticipants it will recruit. After reviewing itspool of potential prospects, the organizationdetermines that the youngest of the 100participants is likely to be age 55 when theprogram begins.

2. After considering the expense and difficultyinvolved in estimating the program lifeexpectancy based upon 100 different lives, theorganization chooses to use the life expectancyof the youngest participant, recognizing that thisrepresents some sacrifice in precision1.According to the Annuity 2000 Tables, the lifeexpectancy of a 55 year-old is 28.5 years, whichthe organization uses as an estimate of theprogram life expectancy.

3. Based upon past experience, the organizationexpects the costs of delivering its charitableservices to rise at an average rate of 3.5% peryear for the duration of the program.

4. Considering the amount of contact andadditional staff time that will be required foreach participant in the charitable life insuranceprogram, the organization estimates that it willspend an average of $40 per year perparticipant, in today’s dollars, on these activities.

Given these assumptions, the organization can makea preliminary estimate of the net present value ofthe proposed life insurance program as follows:

$3,750,000 the present value of $10 millionafter 28.5 years discounted at 3.5%per year2

$100,000 one half3 of the present value ofservicing expenses averaging $40per participant per year

$3,650,000 estimated net present value of theprogram



Where does the money come from and where doesit go before it reaches your charitable organization?

The financial analysis of the charitable life insuranceprogram should produce a clear understanding ofthe financial consequences of the proposedprogram. Questions should include:

What is the charitable organization’scommitment?

How much will it cost the organization and/or its donor(s)?

How much are the commissions, to whomare they paid, and are they reasonable inrelation to the value added for the charity?

How long will the charity and/or its donor ordonors be financially committed?

How much will the charitable organizationreceive when the insured dies?

What is the probability of the charityreceiving that amount (is it guaranteed)?

Under what conditions might the charitablelife insurance program fail to deliver theprojected benefit?

Financial AnalysisOutright Contribution of Policy

The most straightforward application of lifeinsurance in charitable giving is the case where thedonor simply contributes a life insurance policy tothe charity. If the donor transfers ownership of thepolicy to the charity, he or she may be entitled to anincome tax charitable contribution deduction for aportion of the value of the policy. Further premiumpayments are the responsibility of the charity.

Often a generous donor will agree to make annualcontributions to the charity in the amount of thepremium. The charity then pays premiums, and thedonor receives a deduction for the amount donated(deductible up to 30% or 50% of adjusted grossincome). See figure 1.

In a slight variation on the above, the donor maycontinue to make premium payments directly to theinsurer after ownership of the policy is transferredto the charity. In addition to the initial deduction fora portion of the value of the policy, the donorreceives an income tax charitable contributiondeduction for the premium amounts paid on behalfof the charity as well. See figure 2.



Figure 1:Outright Contribution

Figure 2:Variation on OutrightContribution



Figure 3: Premium Financed Plans

Figure 4: Premium Arbitrage Plans



Premium arbitrage plans usually require that theindividual to be insured meets certain specific healthand age criteria in order to secure the favorablepremium pricing. The promoters maintain that underthese conditions they can obtain an annuity that payssignificantly more than the amount of the premiumfor the life insurance policy, leaving enough excessto pay the interest on the loan (if any) and still leavefunds to provide a current return to either thecharitable organization or the outside investors. Seefigure 4.

Commissions

Insurance agents and brokers earn a commission onthe sale of life insurance policies and annuitycontracts. Commissions are one way financialprofessionals are compensated for their advice andexpertise. For a life insurance policy, the commissioncan typically approximate 50% or more of the firstyear’s premium with a smaller amount, in the rangeof 3% to 5% as renewal commissions for the nextseveral years. Determining the “reasonableness” ofa commission can be very difficult. Donors especiallyshould be aware of the reality of commissions andconsider this expense when choosing between lifeinsurance as a charitable gift vehicle versus makingan outright gift.

Financial Soundness

An important component of the analysis is anevaluation of the insurer (see discussion on page22). Insurance companies are rated according totheir financial soundness, credit rating, and debtrating, which are important factors that can directlyaffect the likelihood that projected investmentreturns will be met and projected death benefits willbe paid. A.M. Best Company is the oldest of themany insurance company rating services. Standardand Poors, Moody’s Investor Services, Duff &Phelps/MCM Investment Research, and WeissRatings, Inc., also provide ratings. A.M. Best ratesthe largest number of companies, and uses a 15point scale from A++ (superior) to F (in liquidation).When evaluating an insurance company’s financialstrength, A.M. Best examines the company’s balancesheet strength, operating performance and businessprofile.

When determining the financial soundness of aninsurer, a good strategy is to compare the ratingsfrom two or three of the rating services and toreview the ratings over a period of several years.

Premium Financed Plans

These programs consist of two elements:

A leveraged source of funding pays thepremiums on the life insurance policies. Thesource is usually some type of loan or otherdebt facility, but it can also be fundsinvested by one or more entities.

A number of life insurance policies issuedon the lives of a group of individuals, usuallyconstituents of the charitable organization.

The program relies on a projected number ofinsureds dying on schedule in order to ensure thatthe death benefits collected are sufficient to retirethe debt and continue to provide the premiumpayments required by existing policies.

When all of the insureds have died, the charitableorganization is projected to be left with a significantamount of money or economic benefit despitehaving invested little or, sometimes, no cash overthe course of the program. See figure 3.

Premium Arbitrage Plans

These programs involve the simultaneous purchaseof both an immediate annuity contract and a lifeinsurance policy on the same individual, but usuallyfrom different insurers. The program may beoffered as an “investment” for the charity’sendowment funds, or outside investors may providecapital or the charity might be encouraged to borrowto provide funding for the program. Regardless ofthe funding, the transaction usually involves twosteps:

The funds, from whichever source, are usedto purchase a single premium fixed paymentimmediate annuity on the life of anindividual. This contract provides a fixedannual payment for as long as the individuallives.

Then, a life insurance policy is purchased onthe same individual with a death benefit inthe amount that has been spent on theannuity contract.

Conceptually, the annuity payments provide thesource of funds to pay premiums on the lifeinsurance policy and, when it is finally received, thedeath benefit from the insurance policy will“reimburse” the initial expenditure for the annuitycontract.



identify and quantify any provisions that require thecharitable organization to pledge or hypothecate itsassets for the charitable life insurance program.Such collateral requirements should be evaluatedvery carefully to ensure that you have a clearunderstanding of what those obligations are and ifthey have to be reflected on your balance sheet as aliability. The most conservative analysis requiresconsideration of the possibility that the assets thecharity pledges as collateral might be lost.

Stress Test

Finally, it is important to analyze and understand theterms and conditions of the life insurance policiesthemselves. Most insurers provide policy illustrationsbased upon assumptions regarding investmentreturn, mortality rates, and the cost of insuranceover time. If those assumptions prove wrong,additional premium payments may be required orthe anticipated death benefit may be reduced.

A good financial analysis should include a “stresstest” projecting the performance of the charitablelife insurance program under adversecircumstances, such as a prolonged period ofdepressed investment performance or significantlyextended life expectancies or (if applicable) asignificant change in loan rates. An analysis of theseworst case scenarios can help determine whether ornot to embark on the charitable life insuranceprogram.

Charity’s Obligations

The financial analysis should include a carefulreview of the policies, debt instruments, contracts,and other legal instruments associated with thecharitable life insurance program, in order to ensurethat all of the actual and potential obligations of thecharitable organization are identified and clearlyunderstood.

The financial outlay that the charitable organizationis expected to make over the course of thecharitable life insurance program should be clearlyoutlined. In addition, it is important to identifycontingency and other provisions that might requirea large financial commitment on the part of thecharity under certain circumstances. You shouldidentify the probability that your charitableorganization might be required to make additionalpayments into the charitable life insurance program.

This analysis will help you decide whether thecharitable life insurance program makes financialsense for your organization. In addition, it will allowan evaluation of the opportunity cost of using fundsfor the charitable life insurance program versusallocating those funds to other efforts.

Collateral

The insurer or the lender may require the charitableorganization to provide collateral or guarantee thatpremium payments will be made. It is important to



Structural and RiskAnalysisHow sound is the structure of the program? Whatrisks are associated with the program and how canthe organization anticipate those risks?

Insurable Interest

Early in the history of life insurance, it was notuncommon for people to “wager” on the lives ofothers by purchasing life insurance on a third partywithout that person’s knowledge or consent. Since,under these circumstances, the owner profits fromthe death of the insured, there could be atemptation to speed up the demise of the insured,especially if he or she is a third party unrelated tothe owner of the policy. To prevent this, insurableinterest laws were instituted that restrict the ownersand beneficiaries of a life insurance policy to thosewho have an interest in the continued life of theinsured.

It is permissible, in most states, for a charitableorganization to own life insurance on its supportersor even potential supporters. However, the details ofinsurable interest laws vary by state to state, withsome being less restrictive than others. Therefore, itis important that the charitable organization seeksguidance from its own advisors to ensure thatparticipation in an insurance program complies withapplicable state insurable interest laws.1

Some life insurance programs marketed tocharitable organizations involve funds provided byoutside investors. Charitable organizations should

verify that such arrangements are allowed under theapplicable insurable interest laws of the variousstates that may have jurisdiction.

Charitable organizations should also be mindful ofthe concerns expressed by representatives of theinsurance industry 2 and various legislative andregulatory authorities, including Senate FinanceCommittee Chair Charles Grassley, who has stated,“In entering any transaction, charities need to bevery careful that their tax-exempt status is notproviding inappropriate benefits to a corporation. Apenny of benefit to charities doesn’t excuse a poundof profit to the corporations.”3

Private Benefit Payments

Some charitable life insurance programs offer toprovide a partial death benefit to the heirs of theinsured as an enticement to encourage individuals toagree to be insured under the program. If theprogram you are considering includes suchincentives, be aware that Federal law prohibits acharitable organization from providing financialbenefits to an individual outside of the organizationunless that benefit is provided as part of thecharitable purpose of the organization or aspayment for services performed for the charitableorganization. Charities that engage in plans thatprovide incentive benefits to others may be inviolation of these laws.4

Insurance Capacity

Individuals agreeing to be insured under a charitablelife insurance program should consider the risk thatparticipation may consume life insurance capacityand prevent the acquisition of additional coveragefor personal or other planning needs in the future.

This is a complex matter because the individual’smaximum insurability or “insurance capacity” islargely a facts and circumstances determination,based upon the underwriting guidelines of theinsurer. Although an individual has an unlimitedinsurable interest in his or her own life, the “need”for insurance usually governs the maximum amountof life insurance an insurer will issue on the life ofone individual. Sometimes additional or excessinsurance comes at a higher premium cost.

Insurers use a number of different methods to setthe maximum amount of life insurance that may beissued on an individual’s life, typically either a



companies. Rating information is available on theInternet or in publications usually found in thebusiness section of a public library.

1 J.J. McNab, an independent planner, analyst, andauthor who specializes in advanced tax, charitableand insurance analysis, has created a state-by-state list of insurable interest laws on her websiteat www.deathandtaxes.com/insint.htm

2 Update: Investor-Owned Life Insurance (IOLI),NAIFA Frontline

3 Senator Charles Grassley, “Charities Look toBenefit from a New Twist on Life Insurance,” NewYork Times, June 5, 2004.

4 Debra E. Blum, “For Charities, a New Twist inRaising Money: Corporate Investors in Life-Insurance Policies,” Chronicle of Philanthropy,April 12, 1999 at www.deathandtaxes.com/insint.htm

function of the need to replace income when theinsured dies or the need to pay future estate taxes,and sometimes a combination of the two. A typicalapproach to determining maximum insurancecapacity based upon the need to replace incomeinvolves multiplying the potential insured’s income bya factor that is a function of age. For example:under some guidelines, an insured between 26 and30 years of age would have a maximum insurability,or insurance capacity, of 16 times annual income;for an insured between 41 and 45 years of age, themaximum may be only 12 times income; whilesomeone 61 to 65 years of age might be limited toinsurance of not more than five times their annualincome.

Maximum insurance capacity may never be an issuefor the average constituent. Still, the issue ofinsurance capacity should be carefully explained toeach participant in a charitable life insuranceprogram. Participants should fully understand thatthey may be precluded from acquiring additional lifeinsurance to meet personal or other needs in thefuture as a result of their participation in thecharitable life insurance program.

Viability of the Companies

As discussed more fully on page 19, it is importantto determine whether or not the insurancecompanies involved are viable. If not, the policiesmay, ultimately, become worthless. If a loan is to beused as a part of the charitable life insuranceprogram, you should determine if the lendinginstitution is viable. If not, they may not be there torenew their loan.

The reputation and viability of the insurer and othercompanies involved must be carefully considered.Researching the reputation and background of aninsurance company has become much easier due tothe significant amount of reporting required ofinsurers and the wide availability of public data.

A first step is to contact your State InsuranceCommissioner to be certain that the company islicensed to do business in your state.

In addition, you can check the company’s financialcondition by reviewing its rating and other data.Several rating agencies, including A.M. BestCompany, Fitch Ratings, Moody’s Investor Services,Standard and Poor’s Insurance Rating Service, andWeiss Ratings, assess the financial strength of



Life insurance employs a very specific and technicalvocabulary. An understanding of several key termswill be helpful in the evaluation and comparison ofcharitable life insurance proposals:

account value – the sum of all premium paymentsadjusted by periodic charges, credits andpartial withdrawals.

annuity – a contract issued by an insurer thatpromises to periodically pay an amount to abeneficiary (the amount of the annuity canbe fixed or variable and continue for thelifetime of the insured or last for a shorterperiod according to the terms of thecontract).

beneficiary – the individual or entity to whom thedeath benefit or periodic annuity is to bepaid.

cash surrender value – the value available uponsurrender of the contract.

death benefit – the amount paid upon the death ofthe insured (the amount of the death benefitcan be guaranteed and fixed at the time thepolicy is issued or it can vary according tothe terms of the contract; the net amountavailable may be reduced by loans orwithdrawals made before the death of theinsured).

Appendix 1:

Glossaryguaranteed value / guaranteed rate – policy

illustrations (see Appendix II) usually includecertain minimum or guaranteed rates aswell as assumed rates; guaranteed valuesare those projected based upon theguaranteed rates while values based uponthe assumed rates are not guaranteed.

insured – the individual upon whose life a policy orannuity is issued.

insurer – the insurance company that issues thepolicy or annuity.

owner – the individual or entity that owns thepolicy.

policy – a contract issued by an insurer thatpromises to pay a death benefit to thebeneficiary upon the death of the insured.

policy year – the “fiscal year” of the policy,generally beginning the first day the lifeinsurance coverage is in place; premiumpayments and other outlays are usuallyassumed to be made at the beginning of theyear, while cash values are usually shownas of the end of the policy year.

premium – the amount paid to the insurer inexchange for the contractual promises(insurance policies usually require periodicpayment of premiums during the lifetime ofthe insured; annuities usually require asingle premium payment when the contractis issued).



Appendix 2:

Understandingthe Limitationsof PolicyIllustrationsMost life insurance policy presentations includeillustrations showing how the policy might performover time. These illustrations present financialprojections based upon a number of assumptionsabout the policy.

Policy illustrations include assumptions aboutinterest rates, investment return, future cost ofinsurance (premiums) and other policy expenses.Some illustrations also include assumptions aboutmortality rates (life expectancy of the insured) andother important variables.

Illustrations typically include at least two projections:one based upon assumed or hypothetical rates andanother based upon guaranteed minimum rates. Inaddition, illustrations may include a projection upona “mid-point” assumption, which is usually theaverage between the assumed and guaranteedrates.

The ending values contained in projections basedupon the minimum rates are usually guaranteed.∗

Policy illustrations include explanations of theassumptions upon which the projections are based.Understanding and evaluating the reasonableness ofthe assumptions is critical to the evaluation of thelikelihood that the policy will perform as expected.Most states require written warnings explaining thebasis of the illustrations. A typical assumptiondisclaimer reads as follows:

“This illustration assumes that the currentlyillustrated non-guaranteed elements willcontinue unchanged for all years shown. This isnot likely to occur, and actual results may bemore or less favorable than those shown.

Based on Guaranteed Values, the policy wouldnot terminate. Based on Midpoint Assumptions,the policy would not terminate. Based onCurrent Assumptions, the policy would notterminate.”

Note that even though the second paragraph isphrased in a favorable way (“the policy would notterminate”) there is no guarantee that the policy willperform as illustrated. In analyzing the policy, thegift planner should heed the advice contained in thefirst paragraph: “this is not likely to occur … actualresults may be more or less favorable than thoseshown.”

In addition, many states require the recipient, oftenthe applicant or initial owner of the policy, to sign anacknowledgment of the assumptions and the limitedreliability of the illustration. A typicalacknowledgment reads as follows:

“I have received a copy of this illustration andunderstand that any non-guaranteed elementsillustrated are subject to change and could beeither higher or lower. The agent has told methey are not guaranteed.”

In many charitable applications, the charity is not theinitial purchaser of the policy and may not berequired to consider such an acknowledgment.Nevertheless, the charity should acquire andcarefully review a current policy illustration.

*Note: The “guaranteed values” in the illustrationmay represent the amount available to the charity.In evaluating a life insurance proposal, the giftplanner must take into account the effect of certaintransactions, including loans, withdrawals, anditems that may be deducted from the death benefitor policy ending value. These items can reduce theultimate value of the policy to the charitableorganization.



Appendix 3:

EvaluationChecklist1. Threshold Questions

1.1. What was your initial reaction? If theprogram sounds too good to be true ormay not be legal or ethical, your instinctmay be right. Before your brain gotinvolved, did your gut tell you thatsomething may be wrong? Don’t getcaught up in the sales pitch.

1.2. Do you feel that the program willwork? Don’t check the numbers yet. Don’tresearch the Internal Revenue Code. Justask yourself: Does your gut allow you tobelieve that this program, if all goes asplanned, will work?

1.3. Does the value flow logically? Followthe money. It should flow from point topoint much like water flowing down ariver. It should never move upstreamunless there is a reason.

1.4. Do you feel that government officialswill react favorably? How will the IRSreact to the deduction that will be taken?How will your State Attorney General’soffice react to the actions of the board ofdirectors who approved of using a gift toform a business relationship with thedonor? How will the State InsuranceCommissioner react to your charityinsuring the life of a donor?

1.5. Does the program make economicsense for the donor? Will the donorreceive a benefit from the program and isthat benefit what the donor expects?

1.6. Does the program make economicsense for the charity? Will yourorganization receive a value that willexceed your time and effort? Will the longterm economic gain exceed the potentiallong term cost?

2. Meeting Organizational Priorities

2.1. How does the proposed insuranceprogram fit within the priorities ofyour institution?

2.2. Does your organization ordinarilyborrow money to make investments?If not, why not, and why should youconsider borrowing in this case?

2.3. Are there more efficient ways tospend the time and effort of staff?

2.4. Are there more optimum gifts thatcould be sought from prospectivedonors in the group to be targetedfor the insurance program? Might adonor reduce other contributions becauseof this program?

2.5. Does the promoter require you tosign a “non-disclosure” or similaragreement? If so, what are theramifications for your organization? Will anon-disclosure agreement prevent youroutside counsel or other trusted advisorsfrom reviewing the program?



3.3. What are the contingencies thatmight require additionalcontributions in order to achieve theprojected future pay-off?

3.4. What is the risk that (and amountof) additional payments orcontributions may be required toachieve the target pay-off to theinstitution?

3.5. What is the present value of thecost of staff time and resourcesneeded to manage this program overtime?

3.6. If donors live longer than expected,what is the impact to the program?

3.7. What is the impact on the program ifinterest rates (or loan rates, ifapplicable) change over time? Arerates modeled realistically? (Considerasking for a worst-case model as a“stress test.”)

3.8. How many years must the programbe in effect in order to achieve theexpected pay-off? Are there truly“guaranteed” aspects to the program?

3.9. If this program requires movingexisting endowment assets, will thefuture value of the death benefitexceed the future value of theendowment at life expectancy?

2.6. Is the relationship and compensationof all parties appropriate and fullydisclosed?

2.7. Are those individuals who will beinsured under the program trulyconnected to the charitableorganization through previouscontributions or services, or are theypreviously unknown individuals attractedby the appeal of becoming a “donor” forfree?

2.8. What other charitable organizationshave participated in similar programswith this promoter? How manyprograms of this type does this promoterhave in force?

2.9. If third parties are involved, is thispermissible under state insurableinterest laws? Will donors be aware ofthe involvement of these third parties?Will the donors be comfortable with thethird party having an interest in theirlives?

3. Economic Analysis – know how yourorganization might benefit

3.1. What is the present value of theprojected future pay-off for theinstitution? What is the probability ofachieving the future pay-off as projected?

3.2. What is the present value of therequired expenditures during theprojected lifetime of the gift?



5. Structural and Risk Analysis

5.1. What is the source of the valueadded by each party? What are theexpenses involved with each party? Arethe expenses reasonable compared to thevalue added?

5.2. What are the roles andresponsibilities of each of theparties? Will these be fully disclosed toall involved?

5.3. Are the insurance company, lenderand others involved viable businessentities?

5.4. What is the reputation risk for thecharity and its relationships with itsdonors?

5.5. Does the donor understand andaccept the risk that his or herparticipation may consume life insurancecapacity that could prevent him or herfrom acquiring additional coverage forpersonal or other planning needs in thefuture?

5.6. Are the insurance and other financialproducts involved pricedreasonably? (Under-pricing may be aneven more significant risk thanoverpricing.)

3.10. If this program requires annualcontributions from a donor, will thefuture value of the death benefitexceed the future value, includingearnings, of the cumulativecontributions?

4. Financial Analysis – understand where themoney comes from, where it goes

4.1. Have you created a simple flow-chart or model that explains where themoney comes from and goes before itarrives at the charity?

4.2. Who gets paid, how much and when?

4.3. What is the financial soundness of allof the companies involved (insurersand lenders)?

4.4. How much will the charitableorganization likely be required topay, and when?

4.5. Is the organization required toprovide collateral or otherguarantees? If so, what is the value?How will these liabilities affect theorganization’s financial statements? Ifyour organization is willing to providecollateral, how much is it willing to lose ina worst-case scenario?



Appendix 4:

Quick StartQuestionsThe following questions may be useful as a “quickstart” guide to help the gift planner ascertainwhether or not there is reason to consider theproposed program.

OUTCOMES• What is the projected financial benefit to your

organization?• What is the projected financial benefit to the

investors?• What are the assumptions used in the

projections?• What actuarial assumptions are being used?

COMPENSATION• How are commissions applied?• Will any death benefit be paid to the heirs of the

insured?• On what will the death benefit be based?

LOANS• What will be the interest rate on the loan?• Is the interest rate fixed or adjustable?• Is collateral or other pledges required from your

organization?• To what extent is the charitable organization

liable to the lender in case of a default on theloan?

INVESTOR INFORMATION• What is the financial strength of the participating

insurance companies?• Are there issues that may affect this rating in

the future?• Do the investors have a vested relationship with

each other?• Do the investors maintain the right to sell their

interests to another party?• If yes, under what conditions?• Will the charity be notified in advance of such a

sale?• Will the charity have veto power?• How will the charity be able to track who has

invested in the policies and who owns them atany time?

REGULATORY ISSUES• Will a trust established for purposes of the plan

be subject to regulation under securities laws?• Will payments issued by the investors to the

charity be treated as UBIT?



Appendix 5:

Model Standardsof Practice for theCharitable GiftPlannerPreamble

The purpose of this statement is to encourageresponsible gift planning by urging the adoption ofthe following Standards of Practice by all individualswho work in the charitable gift planning process, giftplanning officers, fund raising consultants, attorneys,accountants, financial planners, life insurance agentsand other financial services professionals(collectively referred to hereafter as “Gift Planners”),and by the institutions that these persons represent.

This statement recognizes that the solicitation,planning and administration of a charitable gift is acomplex process involving philanthropic, personal,financial, and tax considerations, and as such ofteninvolves professionals from various disciplineswhose goals should include working together tostructure a gift that achieves a fair and properbalance between the interests of the donor and thepurposes of the charitable institution.

I. PRIMACY OF PHILANTHROPIC MOTIVATION – Theprincipal basis for making a charitable gift should bea desire on the part of the donor to support thework of charitable institutions.

II. EXPLANATION OF TAX IMPLICATIONS – Congresshas provided tax incentives for charitable giving, andthe emphasis in this statement on philanthropicmotivation in no way minimizes the necessity andappropriateness of a full and accurate explanationby the Gift Planner of those incentives and theirimplications.

III. FULL DISCLOSURE – It is essential to the giftplanning process that the role and relationships ofall parties involved, including how and by whomeach is compensated, be fully disclosed to the donor.A Gift Planner shall not act or purport to act as arepresentative of any charity without the expressknowledge and approval of the charity, and shall not,while employed by the charity, act or purport to actas a representative of the donor, without the expressconsent of both the charity and the donor.

IV. COMPENSATION – Compensation paid to GiftPlanners shall be reasonable and proportionate tothe services provided. Payment of finders fees,commissions or other fees by a donee organizationto an independent Gift Planner as a condition for thedelivery of a gift are never appropriate. Suchpayments lead to abusive practices and may violatecertain state and federal regulations. Likewise,commission-based compensation for Gift Plannerswho are employed by a charitable institution is neverappropriate.

V. COMPETENCE AND PROFESSIONALISM – The GiftPlanner should strive to achieve and maintain a highdegree of competence in his or her chosen area,and shall advise donors only in areas in which he orshe is professionally qualified. It is a hallmark ofprofessionalism for Gift Planners that they realizewhen they have reached the limits of theirknowledge and expertise, and as a result, shouldinclude other professionals in the process. Suchrelationships should be characterized by courtesy,tact and mutual respect.



X. PUBLIC TRUST – Gift Planners shall, in alldealings with donors, institutions and otherprofessionals, act with fairness, honesty, integrityand openness. Except for compensation received forservices, the terms of which have been disclosed tothe donor, they shall have no vested interest thatcould result in personal gain.

Adopted and subscribed to by the NationalCommittee on Planned Giving and theAmerican Council on Gift AnnuitiesMay 7, 1991. Revised April 1999.

VI. CONSULTATION WITH INDEPENDENT ADVISORS –A Gift Planner acting on behalf of a charity shall in allcases strongly encourage the donor to discuss theproposed gift with competent independent legal andtax advisors of the donor’s choice.

VII. CONSULTATION WITH CHARITIES – AlthoughGift Planners frequently and properly counsel donorsconcerning specific charitable gifts without the priorknowledge or approval of the donee organization,the Gift Planners, in order to insure that the gift willaccomplish the donor’s objectives, should encouragethe donor, early in the gift planning process, todiscuss the proposed gift with the charity to whomthe gift is to be made. In cases where the donordesires anonymity, the Gift Planners shall endeavor,on behalf of the undisclosed donor, to obtain thecharity’s input in the gift planning process.

VIII. DESCRIPTION AND REPRESENTATION OF GIFT –The Gift Planner shall make every effort to assurethat the donor receives a full description and anaccurate representation of all aspects of anyproposed charitable gift plan. The consequences forthe charity, the donor and, where applicable, thedonor’s family, should be apparent, and theassumptions underlying any financial illustrationsshould be realistic.

IX. FULL COMPLIANCE – A Gift Planner shall fullycomply with and shall encourage other parties in thegift planning process to fully comply with both theletter and spirit of all applicable federal and statelaws and regulations.


Documents

Charitable Life Insurance Evaluation Guidelines€¦ · 3/5/2017 · These Charitable Life Insurance Evaluation Guidelines are provided as a guide to the charitable gift planner