December 10, 2019

The gift of life insurance

Todd Gindy, a certified financial planner, likes to tell a story about Johnny Carson to illustrate how nonprofits miss a big opportunity when they don’t suggest donors use life insurance policies as a vehicle for charitable giving. 

For years, the longtime host of “The Tonight Show” gave $1 million every year to Children of the Night, an organization founded by Dr. Lois Lee to rescue child victims of sex trafficking. 

But, remembers Gindy, who works for the Encino office of Northwestern Mutual, when Carson died in 2005, the donation stopped. 

“Carson certainly had the wherewithal to be able to endow that gift, and it wouldn’t have taken any meaningful amount away from his heirs,” Gindy said. 

Endowing a perpetual gift of $1 million isn’t something most people can do. Indeed, even making a onetime donation of that size is well out of reach for all but the wealthiest philanthropists. But most people don’t realize that they can name a nonprofit as the beneficiary of a life-insurance policy, and, depending on a potential donor’s age, health and how much they can pay in, their payment to the policy amounts to a tax-deductible annual donation that might cost the donor a few thousand dollars each year for 10 or 20 years, yet add up to approximately the million-dollar level when the policy matures. 

Gifting an insurance policy to a nonprofit can help donors get a bigger financial bang for their charitable bucks, although professionals involved in charitable organizations, as well as those who advise both donors and nonprofits, say that people aren’t taking advantage of the tactic very often. 

“Over the last few years, there has not been a lot of gifting of insurance policies,” said Robert Evans, founder and managing director of The EHL Consulting Group, a global nonprofit consulting firm with a mostly Jewish nonprofit client base. “It has just generally not been something that nonprofits — Jewish or not — have been talking very much about.” 

In 2011, The Jewish Federation of Greater Los Angeles promoted life-insurance gifting as a way for donors to give to the Centennial Endowment fund, but, according to Marla Abraham, senior vice president for endowment planning and premier philanthropy at Federation, only “one or two donors out of 37” actually gave life insurance as a gift, and Federation has received fewer than 10 such gifts in the last five years. 

For younger donors, Abraham said, “The payments are ridiculously low to do something. The hard part is making that commitment at a young age.”

Other nonprofits have been more effective in promoting life insurance as a gifting vehicle, including the Jewish Community Foundation (JCF) of Los Angeles, which has been encouraging some of its donors — particularly younger women who already donate $5,000 or more every year — to endow their gifts by purchasing low-cost designated life insurance policies while continuing their annual donations.

For donors who give at this level — JCF calls it “Lion of Judah” — creating an endowment that would perpetuate a gift of $5,000 would require a $100,000 lump-sum donation. But, depending on the donor’s age, a life-insurance policy that at maturity yields $100,000 could be purchased for far less than that sum. 

“I met with somebody last year in her young 30s who took out a substantial life insurance policy,” said Elliot Kristal, vice president of charitable gift planning at JCF. The policy this young woman took out would ultimately pay out about $1 million upon her death. 

“It was very cheap for her to do that,” Kristal continued. “And while it’s going to be some time before the foundation realizes that donation, it’s a way of spending fewer dollars currently to be more impactful down the line.”

Because the immediate payout to an organization is nil and nonprofits must expect to wait years, even decades, to receive money from gifts of insurance, the tactic is primarily encouraged by larger, well-established organizations — although JCF can help donors to direct the proceeds of an insurance policy gifted to the foundation toward a smaller organization. 

JCF can afford to wait patiently for the larger payout — Kristal estimates that “several millions of dollars’ worth of insurance policies” have been gifted to JCF whose funds have not yet been disbursed because donors are still living — while many nonprofits need the cash more immediately. 

Gindy, who has served on the board of Federation for about eight years and is also a member of the board of BJE — Builders of Jewish Education — has seen this challenge firsthand. 

“Often, organizations need money today; they’re not willing to wait until a person dies,” Gindy said. “There’s this push and pull that goes on within all of our charitable organizations, that they both want an endowment for the future, but they’re also unwilling to forgo the dollars today.”

Another hesitation, Gindy said, stems from the involvement of insurance salesmen in the process. 

“Insurance is sold,” he said. “So even when somebody’s intentions are good, if the idea is brought to them by anybody who happens to be deemed a salesman, it’s always met with initial hesitation.” Gindy said he has been selling insurance for 22 years, and he believes that “if it weren’t called insurance, everybody in the world would be doing it, because what it does tends to make a lot of sense.”