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Feeling Charitable? Think Again

For decades, creating a charitable endowment through life insurance was a popular strategy meant to benefit all participants, including insurance carriers. But that’s not necessarily true anymore. Insurance carriers recently have begun either rejecting charity-owned applications in which the charity is also the beneficiary, or instituting rules limiting the amount of coverage and, ultimately, the dollar amount a designated charity receives.   
Both of these restrictions have severely limited the market for charity-owned life insurance. And industry professionals are beginning to feel the pinch. In a recent survey performed on behalf of a large national charity, only six of 35 insurance carriers replied they would consider allowing a charitable organization to be both owner and beneficiary. This is a marked drop from how we’ve done business in the past. 
Many carriers will allow a donor to apply for coverage with a qualified 501(c)(3) charity beneficiary as long as the donor remains the policyholder. But these same carriers have strict rules regarding previous gifts and, in many cases, coverage is entirely too low to suit the donor’s needs in the first place! Additionally, several carriers are concerned about concentration risk, and have limited the number of policies they accept from any individual organization.  
In a perfect scenario, any charitable organization would remain both owner and beneficiary, with the generous donor writing a check directly to the organization to pay the premiums. This ensures the donor a tax deduction while simultaneously guaranteeing the charity will receive death benefits — a win for both parties. 
Various chief underwriters across the country have examined this topic over the years, and, unfortunately, there’s no clear reason for these arbitrary limitations. 
The only common themes uncovered were compliance-related concerns about state regulations and insurable interest and the ChOLI (charity-owned life insurance) arrangements involving third-party financing that received particularly harsh attention from Congress and the Department of the Treasury in 2010. These governing bodies deemed such arrangements more beneficial for the insurance companies than for the charity. And at the time, they were correct.  
The ChOLI issue, which focused on third-party financing on behalf of certain charities, reached its nadir in 2010 with the University of Oklahoma “Gift of a Lifetime” case. Lincoln National, the primary carrier, was included in a lawsuit that claimed it “understated the costs of the program and overstated its potential financial benefits and charged the university inflated premiums.” 
 This particular case received national attention. Chief underwriters often cite the lawsuit as a reason for limitations on charity-owned policies. And while I agree third-party financing in a charitable setting is patently wrong, our industry should not penalize all charities that rely on direct donor gifts of insurance for survival.  
As far as insurable interest is concerned, the National Association of Insurance Commissioners’ website confirms the majority of states have amended regulations to include qualified charities as having an interest in their donors. We found no specific formulas for determining the coverage a donor may apply for, which means the carriers can make their own rules.  
To top it off, we’re dealing with a lack of industrywide agreement. Policies range from rules based on previous patterns of giving to systems based on a donor’s last gift. It’s no wonder we’re all so confused! 
And what about new donors? They have no pattern of giving and are often denied coverage. If this continues, charitable organizations will have no way to replenish deferred giving programs because — think about it — everyone is a new donor at least once.  
Because so many industry professionals remain tangled in fine print and frustration, it is becoming more difficult to find common ground. 
Through all of this, and even as our industry evolves, charitable gifts of life insurance — managed properly — can be mutually rewarding for both charities and donors. As an industry, we should be encouraging this behavior, not restricting it.  
A qualified donor can make a huge impact by prefunding a large lump-sum charitable contribution. These policies should be well-funded and persistent and create no collateral risk for the carrier.
A Plan for the Future 
Charity-owned life insurance can, and should, remain mutually beneficial. Here is my plan to present a charitable gift appropriately and fairly to an insurance carrier. 
» Ensure the donor can financially justify the gift. Underwriters need assurance a client is not jeopardizing his financial future.  
» Do your regulation homework. Do the regulators in your particular state consider qualified charities as insurable interest? 
» Obtain a copy of the donor’s signed pledge. Make sure the legally binding pledge card shows the total gift amount — an aggregate of all premiums over time. 
» Craft a concise and informative cover letter. Include strictly essential information — such as a donor’s net worth and income — and reiterate the gift will not negatively impact a donor’s financial future.  
» Confirm the ownership and beneficiary information adheres to the specific carrier’s regulations and preferences. Many underwriters wrongly believe a charity has negligible insurable interest in the life of a donor. Eliminate this myth by ensuring your application is buttoned up and conforms to a carrier’s standards. Be specific!  
Additionally, what happens when the charitable organization employs the donor — either as a longtime worker or as a board member? Shouldn’t that valuable time automatically be considered when calculating insurable interest?  
This opinion shift is rooted in the University of Oklahoma case and other similar situations that attempted to insure far too many lives without regard to their relationship to the organization. The result? A small group of insurance and financial firms contaminated an entire charitable market, and it’s an incredible shame for our profession. Fortunately, insurance professionals have the power to correct past mistakes and recognize the true social value in properly constructed charity-owned policies. 
Deferred giving programs with life insurance can be extremely valuable to qualified charities. These and similar programs provide a simple way to engage donors with a guarantee of completion. Donors receive a current tax deduction and make a legally binding commitment that results in a large lump sum for a charitable organization. Life insurance carriers should encourage more of this charitable activity. 

Ron Sussman is founder and chief executive officer of and CPI Companies. He counsels high-net-worth individuals through risk management analysis and life insurance planning strategies. Ron may be contacted at [email protected] [email protected].

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