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Using life insurance strategies in gift planning: Lessons learned


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By Liza Hentz

We’ve all heard the old saying “if a deal sounds too good to be true it probably is”. Well, that expression probably holds true in the gift-planning scenario involving life insurance. The marketing hype makes it sound simple-for both the nonprofit and the donor. A donor makes a substantial gift to charity without ever writing a check or giving up any assets. You are told to just agree to let the charity purchase life insurance on your life, with the premiums paid by a loan from a third-party, and when you are gone… behold!  A significant gift is made to the charity, which on the surface appears to have little or no risk to anyone. All the charity has to do is patiently wait to reap the benefits at some point in the future. Of course, the reality of it all involves very complex financial planning and certain economic variables that must play out in order for the charity to realize a very substantial contribution in the end. To scratch the surface of this complex and debatable scenario, this paper examines two types of insurance plans currently being promoted.

Types of Applications

The charity withdraws an amount from its endowment, usually in the amount of $1 million or more, to purchase an annuity contract on a donor with the contract paying a fixed amount to the charity for the life of the donor. At the same time, the charity purchases a life insurance policy on the same individual through another insurance company, with a death benefit equal to the amount withdrawn from the endowment. A portion of the annuity payment is used to pay the life insurance premium. The key to this plan is to obtain a price differential between the two providers. Theoretically, however, there should not be a price differential unless different mortality tables are used and/or one provider is projecting higher investment returns than the other.  For as long as the donor lives, the charity receives the annual annuity, pays the policy premium and keeps the rest. When the donor passes away, the charity receives the death benefit plus guarantees a return on their principal.

Premium Financed Plan: The Premium Financed Plan involves a pre-arranged loan package that finances the ability to purchase life insurance policies on a group of donors. Theoretically, this group of donors is diverse enough in age, health, etc. to provide death benefits each year to ensure payment on the outstanding policies, plus pay down the debt for the initial loan.  At the end of the term when all members have passed away, the charity is left with a significant gift to their endowment without having to spend any cash in this plan.  The debate is ongoing as to the perfect candidate for such plans, however, most strategists contend that $100 million net worth is still the benchmark. It is becoming more common to promote these strategies to lower net-worth individuals – say in the $5 million to $10 million range.  Most advisors, however, feel when all is said and done that the risks outweigh the benefits from these strategies. 

What is Insurable Interest?

Insurable interest by definition is when loss or damage to something would cause a person to suffer financial or other kinds of loss.  For purposes of life insurance, everyone is considered to have an insurable interest in their own lives.  Life insurance contracts and annuity contracts may be entered into even if the party paying the consideration for the insurance has no insurable interest in the life of the individual insured, that is, if the beneficiary designated is a charitable, educational or religious institution. Such life insurance contracts are said to be owned by the person paying the premiums, not the insured individual. State legislation is currently pending across the country to reform statutes that “wager on someone’s life” as against public policy.

Ask Tough Questions

Nonprofits should carefully examine life insurance plans and ask tough questions.

  • Can your organization afford to take on this kind of risk?
  • Does the proposed insurance plan fit within the priorities of your institution?
  • Does your organization have the needed staff to support such a plan and track accounting involved with different plans?
  • What about “unexpected costs” such as donors living longer than mortality table expectations, policy premium increases, present value of required expenditures, interest rate changes over time, etc?
  • What is the IRS reaction to insuring life of donors?  This is basically uncharted water and private letter rulings are being encouraged.
  • Does the plan pose a reputation risk for your institution and your stewardship with donors?
  • What is the probability of achieving future payoffs as predicted?
  • How connected to the charity are the individuals to be insured – are they valued contributors who share in the mission and vision of the charity or are they unknown individuals that are willing to support the program because of apparent little “risk” to them?
  • Is the insurance company a financially sound and reputable company?


In order to fully weigh the risks and benefits involved in evaluating life insurance in gift planning, it is essential to do a thorough economic and financial analysis of your organization. In most cases, life insurance plans require a number of important variables to play out under certain circumstances in order to provide substantial charitable contributions. Most planned giving officers are not insurance experts and are not equipped to be the judge of whether life insurance products are an appropriate means of charitable gifting for their institution. For this reason, charities are encouraged to incorporate gift acceptance policies as a best practice for gift planners that leave no doubt as to what guidelines to follow regarding life insurance policies. In other developments, pending legislation introduced by Senator Chuck Grassley, Chairman of the Senate Finance Committee on May 3 attempts to crack down on abuses of life insurance contracts involving nonprofit organizations. This legislation builds on the Bush administration’s proposal to deal with life insurance contracts that inappropriately afford benefits to investors that would not otherwise be available without the charity’s involvement.

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Liza Hentz
Assistant Vice President, Planned Giving Advisor
Wachovia National Center for Planned Giving

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