Life Insurance: Potent Tool for Day School Finance
Among the arrows in the quiver of most sophisticated development directors is the permanent (whole life or universal life) insurance policy. Fundraising professionals know that, when structured properly from both a legal and financial perspective, a donor-gifted permanent life insurance policy can help provide long term support for a nonprofit institution. The pitch to a prospective donor is relatively simple: by creating a legacy gift of life insurance and by funding the insurance through one or more annual premiums, a donor can provide meaningful funds to a nonprofit upon his or her death.
The appeal to both donor and nonprofit is fairly straightforward. For the donor, the total sum of the annual premiums will be far less than the death benefit. For example, a $1 million policy might cost the donor $20,000-$30,000 annually. When structured properly, the premiums may even be tax deductible. From the perspective of the nonprofit, there is the guarantee of a large gift at some point in the future.
Local federations such as UJA Federation of New York and Federation of Greater Washington have received hundreds of donor-sponsored life insurance policies over the years and view such policies as important tools in their endowment building efforts. Notwithstanding the potential appeal of such insurance policies, it appears that very few of the more than 300 Jewish day schools in the AVI CHAI universe have secured donor gifts of life insurance. For instance, of the nearly two dozen legacy gifts that have arisen as a result of PEJE’s Generations program (www.peje.org/index.php/endowment-a-legacy-institute/generations), not a single one involves or utilizes life insurance. Possible reasons for this may include a preference among most Jewish day schools for cash gifts over gifts of insurance as well as a preference among donors to use insurance for their own estate planning rather than as a vehicle for charitable giving.
Despite the low utilization of life insurance policies among day schools donors currently, interesting conversations are taking place around new uses for life insurance. In two noteworthy proposals, it is the day school parents themselves that would be asked to take out such insurance for the benefit of their children’s day school. Rabbi Jay Kelman (www.torahinmotion.org/discussions-and-blogs/tuition-plan) suggests that Toronto day schools can cut their tuitions in half through the use of life insurance. With a lower tuition, each day school family could apply a small portion of the tuition savings toward the purchase of life insurance, over approximately a 15 year period. Leading philanthropists and foundations would need to provide an interest-free loan to fund the annual (school) budget shortfall. When the death benefits are realized, the philanthropists and foundations would receive their money back and the schools would be flush with cash.
Rabbi Kelman’s novel idea bears some resemblance to an idea first outlined by Jewish philanthropist Charles Kushner in 2010 (www.jta.org/news/article/2010/04/18/1011634/op-ed-funding-jewish-education-a-self-sustaining-solution). Kushner proposed a program under which all day school parents would agree to be insured for a modest sum of money, with a group of wealthy donors paying the premiums. Both proposals are ambitious and make at least some sense on paper. Unfortunately, there are significant obstacles in bringing the programs to fruition. Beyond the administrative difficulties of such programs, both proposals assume that day schools have an insurable interest1 in all of their parents. This may be a faulty assumption.
Another obstacle is the difficulty in getting an insurance carrier to agree to such a program. I am told by insurance experts that the time and effort required to research and document a small insurance policy is equal to the time and effort it takes to underwrite a large policy. In short, it might be difficult to find an insurance company willing to underwrite thousands of relatively small insurance policies. The final difficulty related to timing. Most day school parents are in their 30s and 40s. With an average life expectancy of 80+, death benefits would not be realized for decades. That’s a long time for schools to wait for money and for donors and foundations to continue funding a program without seeing any payback.
Sometimes the path to success in archery consists not of buying a new arrow, but in sharpening the existing arrows in the quiver. The metaphor might hold true for life insurance as well. We may not need entirely new programs but rather nuanced and more impactful versions of existing ones. One nuance to the traditional approach of soliciting life insurance gifts employed by the two local federations mentioned above is the creation of an insurance premium matching program. Many federations have existing endowment funds or savings accounts and are in a good position to do this. After all, those monies need to be invested in a conservative fashion anyway. What better product to invest those monies in than a life insurance policy. Whole life or universal policies typically have long term expected rates of return in excess of 5% and are triple A-rated. The local Federation may therefore be in a good position to co-fund, or “match,” the insurance premiums which the donor is making.
Let’s take an actual example from the Federation of Greater Washington. One of this federation’s donors was interested in creating a legacy gift using universal life insurance. The donor agreed to a $1 million policy on the donor’s and his wife’s lives (these are called “second to die” policies). The donor agreed to fund an annual premium of $35,000 for three years subject to a match from the federation itself. In other words, the donor contributed $17,500 per year toward the premiums and the federation contributed $17,500 per year toward the premiums. The donor’s premiums amounted to $52,500 and were tax deductible. The federation’s total premiums also amounted to $52,500. The donor is now considered a $1 million donor to the Federation of Greater Washington and is feted as such.
A number of Jewish day schools have existing endowment funds and are in a good position to do the same thing. There are at least 50 Jewish day schools across the country with endowments of $1 million or more. A fair number of these schools could realistically offer to co-fund, or match, the insurance premiums which the donor is making. Not necessarily but few schools would want to commit the majority of their endowment funds to insurance policies.
I’ve recently been part of discussion about the opportunities in what is called insurance premium finance. Under such a program, an individual donor or a school with sufficient endowment funds could borrow the money necessary to fund the life insurance premiums from a bank. The bank would get its principal and (very modest) interest back upon the death of the insured. I am told that there are even banks that view premium finance as a loss leader and are willing to offer what are effectively interest free loans in order to establish a relationship with wealthy clients.
Here’s an actual example. A West coast-based insurance brokerage firm recently secured a $20 million life insurance policy for a wealthy male client in his 50s. The premiums are $7 million over three years ($3mm, $3mm $1mm) and will be financed by a large European bank at virtually no cost to the client. What’s in it for the bank? Firstly, the bank acquires a new client. The client in our illustration agreed to deposit $2 million in an asset management program with the bank. Asset management programs generate significant fees for banks and brokerage firms. The client also agreed to leave another $1 million of collateral with the bank. Furthermore, the insurance policy itself is valuable and is viewed by the bank as part of its loan collateral. As the policy amasses cash value2 over time, the cash goes to the bank to (at least partially) satisfy its loan. When the client dies, part of the $20 million will go to his heirs through a life insurance trust. Part will also go to variety of charities.
While structuring a day school-based program around premium finance might also be somewhat complex, the potential benefit to Jewish day schools is significant. According to PEJE, the top 100 Jewish day schools possess a cumulative endowment of at least $250 million. If half of it were invested with a group of banks offering similar premium finance programs, it would enable a group of individuals to purchase hundreds of millions of dollars of insurance, all for the benefit of their day schools. In the case of day schools without significant endowments, any one or more individual(s) could make the bank investment and the insurance policy could be written on any number of individuals, including parents, donors, a school head, key teachers etc. (anyone with whom the school has an insurable interest). To be clear, the hundreds of millions of dollars would only be realized when the insured individuals died and that might not occur for two decades or more. Still, this seems like a compelling use of a school endowment funds.
While neither of these programs is as new or bold as the Kellman and Kushner proposals, they may be more realistic. After all, sometimes the best way to hit a target is to simply use a sharper arrow.♦
1 In dealing with life insurance, a person (or institution) is deemed to have insurable interest when the purchaser has a reasonable expectation of profit or benefit from the continued life of the insured.
2 Permanent life insurance policies typically accumulate value during the policyholder’s lifetime.
Daniel Perla is a program officer in day school finance at the AVI CHAI Foundation in New York. He can be reached at [email protected].