Charitable Life Insurance: Schemes and Dreams

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1 Charitable Life : Schemes and Dreams Planned Giving Group of New England All Day Conference Craig C. Wruck May 6, 2015 Life Basics Contributions of Life Life Programs Evaluating Life Life Insurer Promises to pay an amount of money (the death benefit) upon the death of the insured Owner Buys and (usually) pays for the policy; has right to change beneficiary and to give away ownership Insured The one upon whose death the insurer will pay the death benefit Beneficiary The one to whom the death benefit will be paid 1

2 Cost of 100,000 individuals insured All the same age $50,000 death benefit Age Probability of Number Total Death Death Dead Benefit Paid Cost Per $7,140,000 $ $11,615,000 $ $27,560,000 $ ,141 $57,035,000 $ ,558 $127,895,000 $1, ,446 $322,285,000 $3, ,401 $870,065,000 $8, Life P R E M I U M Vanishing Premium Variable / Universal Term Whole Life AGE OF INSURED Life Outright Gift Charity Death Benefit Pays Premiums Commissions Donor Sells Agent 2

3 Life Outright Gift Charity Premium Payments Death Benefit Contributions Toward Premium Commissions Donor Sells Agent Contributions of Life Charity must be named beneficiary in order to receive death benefit Income tax benefits available to donor if charity is also named owner of the policy: Income tax deduction for value of policy Future premium payments are also deductible Other Considerations Charity is not obligated to make future premium payments even though donors may expect otherwise Outstanding policy loans, other conditions may reduce value of death benefit Polices are valuable assets and should periodically be reviewed and evaluated Accept paid up death benefit Cash in the policy 3

4 Premium Financed Charity Premium Payments Death Benefits Insurability Funds Commissions Repayments Donors (many) Lender / Investor Sells Policies Agent Premium Arbitrage Charity Insurability Donor Premium Payments Death Benefits Purchase Payment Annuity Payments Sells & Annuity Cryptic Acme Agent Commissions Premium Financed Life Well known donor has already given millions proposes purchase of many new life insurance policies on lives of select supporters Premiums are to be financed with a loan from an investment fund affiliated with the donor Projections show death benefits from the policies sufficient to: Pay back loans Leave millions for the university 4

5 Oklahoma State University Athletics and longtime donor and supporter T. Boone Pickens Cowboy Athletics Foundation purchases new insurance policies on 27 willing supporters Death benefit = $10 million each $16.6 annual million premiums to be paid with contributions & premium financing Projections show eventual proceeds of $350 million $33.2 million premiums paid in 2007 & university asks to cancel all policies and demands refund of premiums paid (no one has died yet!) Claims financing was not available as promised Alleges millions of dollars paid in commissions was unreasonable and not made clear 5

6 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION THE LINCOLN NATIONAL LIFE : INSURANCE COMPANY, : : Plaintiff : : CIVIL ACTION NO. v. : 3 10CV 173 P : COWBOY ATHLETICS, INC., : : Defendant : 2010 insurer sues, university countersues alleging misrepresentation regarding: Availability of financing for premiums Anticipated mortality of insureds Payment of $10.9 million in commissions 2012 Court finds for insurer: University agreed to the plan and accepted the underlying assumptions when it received the policies and paid premiums Insurer can keep $33.2 million in premiums University must pay costs of litigation incurred by insurer and insurance brokers 6

7 5 th U.S. Circuit Court of Appeals: "This isn't Cowboy's first rodeo. After two years passed without the occurrence of any insureds' deaths, Cowboy became dissatisfied with the program's lack of profitability." 7

8 Evaluating Life Guaranteed insurance is exceedingly rare Compare projected values to guaranteed Carefully evaluate proposed insurance programs Value and values Time to decide Nothing is free Charitable interest Obligations and commitments 8