The Hidden Gift

The Hidden Gift

Article posted in Intangible Personal Property on 7 October 2010| comments
audience: National Publication | last updated: 18 May 2011


Billions of dollars of life insurance death benefits are owned by charities. This short article by Steve Zeiger, Israel Lustig and Dick Weber will explain a new technique that can dramatically reduce the cost of holding some of these policies. And for elderly donors, there

By Steven S. Zeiger, Israel Lustig and Dick Weber

The problem is very simple. Some life insurance policies that have been donated to charity require the charity to continue to pay premiums for the balance of the insured’s life.  Is there a way to receive the same death benefit from the policy while reducing the premiums?  The answer is YES if the charity has any insured donors who are now uninsurable or who have  reduced life expectancies due to new health risks occurring after the policies were issued.

In many cases it is possible for a charity to save significant amounts of premium dollars and still retain the current death benefit of the policy when the individual is either:

1.    Newly uninsurable due to deteriorated health, or
2.    May still be insurable, but now has a life expectancy less than the life expectancy assumed when the policy was issued and the original premiums were computed.


Consider two 40 year old men purchasing $1M policies, each with annual premiums of $7,000 and coverage projected to age 100. Age 100 is not their life expectancy.  A large group of non-smoking 40 year old males in reasonably good health has an average life expectancy of age 85 – half the group will die by age 85 and half will die after age 85. Age 100, on the other hand, is the typical length of time for which a policy illustration is run to far exceed likely longevity.

In our example, one of the two men develops a health problem and will not likely live to his original group’s life expectancy of 85.  The question becomes, “can the person with the health problem pay less premium than the person without the health problem?”  In some cases the answer is “yes.”  And if a charity owns the life insurance, this means it may be able to pay less and have more for its mission. This is the hidden gift! How large a gift depends on the situation.

Case Study

We recently worked with a 85-year-old donor whose charity-owned life insurance policy illustration confirmed that in order to maintain the policy to age 100 (well past average life expectancy of age 93) it would be necessary to pay an annual premium of $250,000 to sustain the policy’s $4M death benefit. 

However, based upon the donor's newly acquired attending physician statements and the determination of two medical actuarial firms, it was calculated that the insured’s revised average life expectancy had reduced to  age 90.  Upon request, the insurance company made a premium calculation of just $140,000 to maintain the policy to age 95 rather than age 100.  Note that age 95 represents the time in the future for an original group of impaired 85-year olds when 90% of the original group have died and only 10% are still alive.

In order to perform this type of study, attending physician statements for at least the past five years were gathered and evaluated by two or more actuarial firms specializing in personalized life expectancy calculations. Then, with information from the policy and current account value information, qualified consultants used the life expectancy data to determine appropriate premium funding levels for different assumed levels of life expectancy.  These are often set to a conservative requirement of the insured's 85th or even 90th percentile of life expectancy in order to protect the charity in the event the insured lives slightly longer than anticipated. Armed with this information, the consultant and client's advisors began to manage the policy to optimize the death benefit while minimizing the cash flow necessary to keep the policy in force until death.

Look at the hidden gift: the policy premium was reduced to $140,000 from $250,000, a savings of $110,000 per year. The donor was age 85 at the time of the analysis, and the new life expectancy was calculated to be age 90. That’s at least five years of premium savings at $110,000 per year or $550,000 in cash flows to assist the charity in its mission. And if the donor should die sooner, the charity receives the four million dollar death benefit and the premiums cease.


This article was written by Steven S. Zeiger, Israel Lustig and Dick Weber and Steven Zeiger. They can be contacted at (917) 750-6201 or

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