Deferred giving programs can effectively build future assets for a healthcare organization’s foundation.
As healthcare foundations examine the various deferred gift options available to bolster their asset portfolios, they may want to consider the unique advantages of charitable life insurance. Charitable life insurance is an ideal gift because it is easy to implement and because it comes with the financial leverage that only life insurance can provide.
Understanding the Basics
Charitable life insurance uses a simple concept:
An interested donor applies for a life insurance policy and names the healthcare organization as both owner and beneficiary of the policy. The healthcare organization and the donor can tailor the policy face amount and the underlying premium payments, to meet their specific requirements.
Advantages of charitable giving through life insurance include:
- Appealing to individuals at all income levels
- Providing what might be the only way an individual of modest means can become a major donor
- Offering an option that is simple to establish and maintain
- Guaranteeing a benefit to the healthcare organization
- Endowing the donor’s gift so that financial support of the organization continues after the donor’s death
- Ensuring no threat to heirs because it does not deplete estate assets
Establishing a Simple Process
The first decision involved in establishing a charitable life insurance policy is whether to designate the donor or the healthcare organization as the owner of the policy. Designating the charitable organization as both owner and beneficiary provides the maximum tax leverage for the donor and control for the organization. The dual designation allows the donor to receive a tax deduction subject to a limit of 30 percent of adjusted gross income. The charity also benefits from this arrangement because it will control the beneficiary designation and cash value and will ensure that premium payments continue to keep the policy in force.
Policies retained by the healthcare organization become valuable assets. Under such an arrangement, the healthcare organization should pay the policy premium and seek reimbursement by the donor. The donor should not pay the premium directly to the insurer because such a direct payment might make it difficult to prove that a charitable contribution was made in the event of an audit. The healthcare organization’s payment of premiums also ensures that it retains control of the contract’s funding and that the policy remains in effect. The healthcare organization also may arrange convenient consolidated billing to streamline the payment process for multiple policies issued by the same carrier.
Donors can tailor the type of insurance policy used to fund a charitable life insurance gift to their needs and charitable inclinations.
A whole life policy offers a conservative approach with more guarantees and less volatility due to fluctuating interest rates than other types of policies. Whole life policies can be funded entirely in one lump-sum amount or annually.
A universal life policy provides more flexibility to the organization and to the donor in the event that either wishes to increase (assuming the donor is still insurable) or decrease the death benefit based on the funding ability of the donor in later years. Such policies also potentially allow for a buildup of cash value, should the organization decide that access to the accumulated funds in the policy is warranted.
A lapse-protection contract, or no-lapse guarantee policy, is designed to require the least amount of funding possible to ensure that the policy will remain in force throughout the donor’s lifetime.
A “second to die” universal or whole life policy insures the lives of two related individuals (e.g., spouses or partners). In this arrangement, the face value of the policy pays to the organization upon the death of the second individual. Although this type of policy usually defers the receipt of the proceeds, the face value often is significantly larger than (sometimes double) the amount of a “first to die” policy. Consider the following scenario:
Mr. & Mrs. Smith decide to purchase a $1 million life insurance policy with the hospital as the owner and beneficiary of the policy. The policy is funded through a $6,700 annual donation from Mr. & Mrs. Smith. The premiums on the policy must continue to be paid following the death of either Mr. or Mrs. Smith (the “first to die”), and the policy will not be paid out to the hospital until both Mr. and Mrs. Smith are deceased.
Understanding Policy Obligations
Healthcare organizations that own the policy have all of the rights and privileges associated with this unilateral contract. Powers that come with policy ownership include:
- Changing the premium mode
- Selecting and changing the dividend option (e.g., reinvesting or withdrawing dividends)
- Borrowing from the cash value of the policy (allowable only on cash accumulation policies)
- Selecting a settlement option at the death of the insured
The donor is expected to pay premiums until the policy is completely paid. If the donor is unable to make the premium donations or for some reason chooses not to do so, the organization’s options include:
- Keeping the insurance in effect by paying the premium from foundation funds
- Using dividends to pay the premium (presuming sufficient dividends to do so)
- Taking a reduced paid-up policy
- Surrendering the policy for its current cash value
Frequently, the best option is to pay the premium from other foundation funds to keep the insurance in effect, unless the policy was less than five years old and had little cash value.
Addressing the Challenge of Deferred Gifts
Life insurance differs from other deferred gifts because it creates capital. Generally, the cost of funding a life-insurance gift is one cent to four cents annually for each dollar of benefit. These features can increase the appeal of charitable life insurance to individuals of all income and estate levels.
One challenge that the healthcare organization can face when presenting the concept of deferred gifts to prospective donors is the perception that deferred gifting will take money away from the donors’ heirs. Children and other family members may discourage donors from providing significant deferred gifts because they, too, do not want their inheritance given away. Charitable life insurance is ideal to address inheritance concerns because it creates wealth and it is possible to structure it to have minimum impact on the anticipated inheritance of the heirs of the donor.
Identifying Prospective Donors
Prospective donors to a charitable life insurance program are primarily people committed to guaranteeing the beneficiary organization’s future. Such potential donors include current board members and donors who want to endow their giving to allow their support to continue after they have died.
Potential donors also include employees of the organization with a vested interest in the financial health of the institution. A salary deduction-based charitable life insurance gift is convenient and allows every employee to amass a relatively major gift to the organization. Consider the following scenario involving an employee donor:
Cynthia Bedford, age 52, is passionate about working at the hospital, but her personal circumstances are such that she cannot afford to make a large contribution. She elects to have $50 deducted from her pay on a semimonthly basis to purchase a $65,000 life insurance policy with the hospital as the owner and beneficiary of the policy. The policy is paid up when she retires at age 65.
Some donors will want their charitable life insurance donation to honor or memorialize a loved one. Because deferred life insurance gifts are larger than the premiums paid, they provide an attractive and motivating alternative to outright cash gifts.
Other potential charitable life insurance donors are those who want their gift to garner attention. Studies on charitable gifts to institutions indicate that being recognized, while rarely the most important motivational factor, is among the top five factors. Organizations are well-advised to recognize the donor for the amount of the death benefit as a future gift.
Other prospective donors include people with existing life insurance policies who no longer need the policy due to their changing life circumstances.
Overall, charitable life insurance can offer finance managers who can look beyond current obligations a solid tactic to secure their organizations’ futures.
Randall W. Luecke, CPA, is CFO of Eckerd, Clearwater, Fla..
Joseph C. Fernandez, CFP, is a financial services representative, Principal Financial Group, Tampa, Fla..
Marjorie W. DeCanio, CFP, is a senior financial representative, Principal Financial Group, Sarasota, Fla..
Publication Date: Monday, March 03, 2014