Annuities Can Be Part Of A Charitable Gift Replenishment Structure

May and June are filled with university and high school graduations. As school administrators launch into Latin extolling the virtues of scholarship and citizenship, expect them to gaze beyond the mortarboards and toward the parents and alumni sitting in the audience.

It’s those people sitting in the back rows whose gifts make graduation possible for many, as well as help fund the bucolic college campus.

For life insurance advisors with clients deeply committed to their alma maters or their favorite charities, funding charitable gifting through a life insurance policy offers unique advantages for the donor, the recipient institution and the insurance agent.

Kevin Cox, advanced sales group executive with Lincoln Financial Distributors, said life insurance is the “ultimate leverage tool for gifting,” as the gift spins off thousands of dollars every year and even more when the market does well.

Donors, he said, are more attracted to the recognition than they are to the tax advantages of gifting. As a result, a charitable gift replenishment structure is a way for institutions to recognize donors every year as the investment spins off interest.

“Not only will the donor get a big recognition for the initial gift but there’s recognition of the donor annually because the charity will recognize the donor every year if the annuity payout is greater than the guaranteed amount,” Cox told InsuranceNewsNet.

Cox said that for agents and advisors, a charitable gift replenishment structure is “a great excuse for the agent to talk to the donor.”

“Telling that donor that you, the agent, just gave your favorite charity another $5,000 check - isn’t that a great phone call to make?” he said.

A properly designed charitable gift replenishment program can provide guaranteed cash flow, access to capital and upside market potential. For agents, there’s a lot of opportunity to collect on the renewal commission along with the first-year commission.

“The annuity will pay a first-year commission and then a tail of compensation based on asset value, so there’s an ongoing source of long-term compensation and, given the market returns and values that go up over time, the compensation to the agent can be quite attractive in terms of the tail compensation,” Cox said.

For perspective on the size of the charitable giving market, individual giving to nonprofits amounted to $228.93 billion, or 72 percent of the $316.23 billion in private charitable giving in 2012, according to “Giving USA 2013: The Annual Report on Philanthropy for the Year 2012,” published by the Giving USA Foundation.

Foundations were the next largest givers with $45.74 billion, or 15 percent of the total, followed by bequests with $23.41 billion, or 7 percent, and corporations with $18.15 billion, or 6 percent, according to the annual report.

Cox, who delivered a seminar on charitable gift replenishment earlier this month at a clinic sponsored by the Society of Financial Service Professionals, offered details about how approximate hypothetical numbers work.

Say the charity gets a $1 million gift in the form of a life insurance policy for a 70-year-old couple.

The $1 million is owned entirely by the charity. Of that, approximately $505,000 goes to the charity in cash, which charities love because they can spend it on immediate needs, and about $474,000 goes to an annuity with income for life.

The annuity guarantees 4.5 percent, or $21,292 every year, which is used to pay the internal premium on the survivorship universal life policy for $1 million with no administration on the part of the charity.

The actual first-year annuity payment of 5.8 percent, or $27,443, creates excess cash flow of $6,151 to the charity. If the market does well, the charity does even better since we’re talking about a variable annuity such as one contained in Lincoln’s Choice Plus Annity with Income for Life.

Cox said that if the donor dies, the charity get the annuity account value in addition to the life insurance death benefit.

Are there other ways of charitable gifting? Of course. Are there other products from other life insurance distributors designed with a similar solution in mind? There are.

But the point of a charitable gift replenishment structure is to connect all three parties: the donor, the recipient and the insurance agent together. Too often, charities hit donors up for money, the donors open their wallets, and the charity isn’t heard from again — until the coffers run low.

“The issue in our business is that we get a black eye because an agent does a transaction and you never see the agent again. But with this type of a transaction, it keeps people in the loop with everybody else,” Cox said.

He also said the idea of structuring charitable gift replenishment using life insurance and a variable annuity came to him several years ago when he was at a charity event and “someone from the charity stood up and said they would like to thank their insurance agent.”

“My point here is that I’m trying to take the emotional level up a bracket or two,” Cox said. “You have to remember that making people feel passionate about their charity is the goal. If we can get the advisor to move to a higher emotional level for the charity, then everybody wins.”

“The insurance premium will be paid no matter what happens in the market. If we’re doing insurance, it will be a fairly long-term plan,” he also said. “With the annuity, over the long term, the markets correct and tend to go up. Some years the charity won’t get any excess money it and other years it will.”

“But the point is that it’s a way for agents to stay in front of clients,” he said. “It provides an opportunity for the agent to be in touch with the charity and the donor, like a tickler file. It’s a celebratory phone call that the agent is making.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].