CGNA: Chapter 6 - Life Insurance, Advanced - Part 3 of 3

CGNA: Chapter 6 - Life Insurance, Advanced - Part 3 of 3

Article posted in General on 21 August 2018| comments
audience: National Publication, Bryan K. Clontz, CFP®, CLU, ChFC, CAP, AEP | last updated: 23 August 2018


We finish the chapter on Gifts of Life Insurance with more advanced concepts.


This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

Things You Must Do

Like most planning, the parties can avert many of the future problems on the front-end. This is especially true with life insurance as most charities’ Gift Acceptance Policies are not robust enough. Most importantly, the donor and charity should always have a Memo of Understanding, an expectation-setting step that will alleviate any future misunderstandings.

Gift Acceptance Challenges and Solutions: Key Questions

Policy Management—One staff person must be responsible for policy acceptance and stewardship. Does the policy meet the original guidelines for acceptance? Was the policy conservatively designed? Was there an expectation the donor would pay up the policy quickly? How is the policy performing?

Policy Under-Performing—What if the policy is not meeting expectations—can the donor increase premiums? Or can the charity exchange the policy for another? Note that charities should be very careful about replacing the policy, as this can just put the new policy in worse shape—new commissions/expenses, surrender period, etc. But in some instances, mortality rates have dropped markedly and newer policies can be much more competitive than older policies, so an external review every five years or so can be advantageous.

Donor Stops Premium Payments—This scenario must be covered in the Memo of Understanding. A charity has five primary options:

  1. Surrender the policy for the cash value.

  2. Sell the policy in the secondary market (life settlement).

  3. Take a reduced paid-up policy.

  4. The charity can keep paying for the policy (but perhaps will change the beneficiary to the operating or unrestricted fund.

  5. Do nothing and let the policy run out of money in due time. In many cases, the servicing agent may be able to help discuss the options.

Policy Valuation / Substantiation—The staff person responsible for the insurance port- folio should coordinate the annual policy statements for FASB purposes, and should also make sure the organization is substantiating premium payments accurately in the donor’s acknowledgment letter.

Critical Questions—The charity should never hesitate to ask for all potential risks to be disclosed. It should always ask for references, in particular for institutional programs. Always ask who gets paid exactly what, when and under what circumstances. If they are not willing to disclose the moving parts with full transparency, the organization is correct to question motives.

Life Insurance Additional Resources

Below are further details on gifts of life insurance. Life insurance topics are based on my article, “Charitable Gifts of Life Insurance: The Lone Ranger or Black Bart.” For quick take-aways on gifts of life insurance, see Life Insurance Quick Take-Aways. For a review based on that article, see Life Insurance Intermediate. For an in-depth examination adapted and excerpted from the article, see Life Insurance Advanced. For further details, see Life Insurance Additional Resources.

For wealth replacement and life settlement strategies, see Brietstein, J. (March 9, 2004), “Innovative Strategies for Using Life Insurance in Charitable Giving,” Planned Giving Design Center,

For examples of policies which a college or other organization’s planned giving department might apply, see Willock, G.E. (October 2010), “Philanthropic Planning with Life Insurance,” Partnership for Philanthropic Planning,

For a high-level discussion of life insurance donations from the charity’s perspective, see Leimberg, S.R. and Zipse, R.L. (2008), “Life Insurance and Charitable Planning: How to Stay on the Right Side of the Comfort Line in the (Quick) Sand,” Journal of Gift Planning, 2nd Quarter 2008, 11,

For a look at different types of life insurance in the gift planning context, see Abramson, E.L., “Evaluating Creative Planned Giving Scenarios Involving Life Insurance Part 1: An Introduction to Life Insurance Products,” Journal of Gift Planning, 2nd Quarter 2004, 47,; and “Evaluating Creative Planned Giving Scenarios Involving Life Insurance Part 2: Premium Financed Life Insurance,” Journal of Gift Planning, 3rd Quarter 2004, 13,

For an example of a college’s internal policy on acceptance of life insurance gifts, see Northwestern University Office of Alumni Relations and Development (December 1, 2009), “Policy on Acceptance and Management of Gifts of Life Insurance,”

IRC §§ 79(a) – (b) (group-term life insurance and donations thereof ) IRC § 170(f )(10) (charitable split-dollar arrangements)

IRC § 6050V (reporting requirements for nonprofits acquiring certain life insurance contracts)

Private Letter Ruling 9110016 (requirement that the policy owner have an insurable interest)

IRS Form 8921, Applicable Insurance Contracts Information Return (form for reporting nonprofit’s qualifying life insurance transactions)

U.S. v. Ryerson, 312 US 260 (1941) (determining deduction amount for donated policy)

Tuttle v. U.S., 436 F.2d 69 (2d Cir. 1970) (conditions which reduce deduction for donated policy)

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