FundSvcs Community

Do any of you have language in your Gift Acceptance Policy that addresses whether your institution could/should/doesn't make changes to life insurance policies that you're the owner & beneficiary of, particularly to extend the coverage beyond the age listed in the policy? 

As an example, a donor made us the owner & beneficiary of her life insurance policy many years ago. The donor is now 85, very healthy and very active. If we do nothing and she lives past 99 years old, we would collect nothing from the policy. An advisor to our college is encouraging us to make changes to the policy to extend the length of the policy.  One option the advisor presented would entail us to be eligible for the full $650,000 payout if she dies up to age 125, but we would need to begin paying premiums ($10K/yr for 17 years, for a total of $170k).

Is it wise to address this option in our GAP?

If you are the owner of the life insurance policy, and there were no agreed-to restrictions when you accepted the gift, you can do as you wish, and you don't need your GAP to specify any rules about that. Nevertheless, I've seen policies name out the possibilities, eg 'if the policy is not paid up, we will request that the donor donate all future premium payments. If the donor elects to stop paying the premiums, [org] may, at its sole discretion, continue to pay the premiums, convert the policy to a paid-up policy,  surrender it for its current cash value, or otherwise dispose of the policy by any available means.' Naming it out may be useful in setting expectations with the donor, but it doesn't really change your organization's rights. 

Many orgs use their GAPs to specify the terms under which they will accept life insurance policies, and rule out some of the possible issues you raise by simply not accepting term life policies, or not accepting policies that are not fully-paid or accompanied by a gift to cover future payments, or at least some number of years of future payments. Basically, the orgs are trying to define a set of gifts that match the org's risk profile and administrative capacity. Approaches to life insurance gifts are all over the map in the GAPs I've reviewed. Some GAPs have as little as 1-2 sentences, others have 15+ bullet points and provisions. My preference, if you are going to accept a wide variety of gifts, is that you assert maximum authority over how to handle them in a brief paragraph. If you're trying to define an easy-to-manage gift that you're willing to accept, it makes sense to spell out the parameters in greater detail, so that you only get those easier gifts. 

Thanks, Isaac, that makes sense regarding the GAP.

I wonder then if there are Best Practice recommendations on whether/when institutions should ever engage in investing in a life insurance policy extension like the scenario I illustrate here. Have others done this? Do you have factors or guidelines to help establish your decision-making process?

Gwen

Most of the institutions I've visited in the past decade or so are writing into their GAP that they won't accept gifts of life insurance. Or, if they do they have an internal policy to immediately sell them. Unless the donor is very old or in bad health, you can typically do better investing the proceeds from the sale.

BTW, do not forget that as emphasized in PPA 2006, if a donor wants to claim a deduction for a donated life insurance policy, they most often will need an appraisal and file and 8283.

John

Re term life insurance specifically, it is designed to be, on average, a negative return investment. While any given policy may pay out more that it collected in premiums, the actuarial math is designed so that on average, the insurance company gets more money than it pays out. In a situation like the one you're describing, it sounds like you can make no changes and collect $650k if the donor passes by age 99, or pay $10k/year from now and until the donor turns 102, for the right to get $650k if the donor passes at age 100+

A financial advisor can run the numbers with precision, but roughly speaking, the average life expectancy of an 85yo woman is roughly 7 years, so about half of 85yo women reach 92. I don't know what percentage of 85yo women reach 100, but it is certainly less than half of those who reach 92. Very roughly then, we can say that you have more than 75% chance of getting $650k, but let's just say that it's only 75%. Your expected value for doing nothing is $488k. Your expected value if you extend the policy is the full $650k, minus $170k in premiums, which is $480k. I'm ignoring the minor differences for if the donor passes while you're still paying premiums, or in the couple of years where they pass after age 99, but before you finish paying premiums. Your return is worse no matter what. Keep in mind also that I've ignored the time value of money, but you'd be paying premiums with earlier, more valuable dollars, and receiving payout in later, less valuable dollars. Again, a financial advisor can account for all of these. But even in a very rough analysis, it's pretty clear that extending the policy is a bad investment (at least on the terms I've assumed), and is especially bad compared to putting $17k/year over a 10-year term into even a conservative investment like government bonds.