Presenting a Life Settlement Option to Charities

The director of the planned giving department at a charitable organization just sat down with the organization’s chief financial officer for their monthly meeting. In addition to the usual items on their agenda, there’s a new item, “Life Insurance Policies.”

We Have a Problem

The director says, “As you know, we own a sizable number of life insurance policies on donors. The policies were either donated by these individuals or purchased outright by us with their support. As you also know, we instituted a program a few years back to review the policies regularly to ensure we have a handle on how they’re performing. Most of the policies in the portfolio are performing adequately, meaning that at their current level of funding, we should expect them to remain in force and pay the death benefit to at least the donor’s life expectancy and then some.’

‘However, we have a few policies that have become problematic over the last couple of years and, at their current level of funding, which the donors provide, aren’t projected to stay in force to the insureds’ life expectancy. In some cases, not even close. The agents servicing the policies tell us that the underperformance is attributable to reduced crediting rates, increases in costs-of-insurance or both. They’ve shown us illustrations that depict various steps we can take with the policies, including increasing the premium to extend the policies’ viability and reducing the death benefit to an amount that will be supported by current funding to the donor’s life expectancy.’

Life Settlement Option

‘The agents also put another option on the table, a life settlement. We would sell a policy to a third party for cash, expecting to receive a price substantially greater than the cash value we’d get on surrender but less than the death benefit. Not every policy is marketable, so we’d have to understand the parameters for that. We haven’t done one of these transactions, but I’ve spoken with some counterparts at other organizations who have, and they’ve given me some tips on how to proceed. And when I say “proceed,” I don’t just mean with the transaction itself. I mean diplomatically with the insured donors and their families who are obviously of great importance to us and whom we should expect to have many questions and concerns about the transaction.

‘And, by the way, we also have some situations where the policies themselves aren’t necessarily in the kind of trouble I described, but the donors are starting to tell us that they’re unable or unwilling to continue to support the policies. So, what we learn about dealing with the troubled policies will obviously be helpful when we address the other policies and their donors. I know that, in either case, we’ll have to be prepared to hear from some that if they agree to increase their support of the policies or even maintain it at the current level, they’ll offset all or part of their ongoing support of the policies against their contributions to the annual campaign.’

Developing a Plan

The director tells the CFO, “I’d like to ask the agents to come in and walk us through the transaction to determine how to evaluate it on the numbers and get an idea of how to present the transaction to the donors. OK?” The CFO says, “I like your approach. I may not know the first thing about life settlements, but I know a few things about important donors and their families. And I know that we have to be careful here. So, sure, let’s set up a meeting with the agents. And like we do when we interview investment managers, let’s provide them with a presentation agenda so we don’t just get a canned marketing pitch for life settlements. Maybe your counterparts can help you with that.”

Developing the Agents’ Agenda

That afternoon, the director speaks with some of his counterparts who’ve done life settlements to get greater insights on how to construct the agents’ presentation agenda, talk with the donors and families and so forth. Here’s what the director took away from those conversations:

The Transaction

The agents should give us the full story about where a policy stands today, where it’s headed under current funding and how things would look under various options for remediation. This isn’t as straightforward as it sounds because every option for remediation involves assumptions, and assumptions involve guesswork and guesswork invites second-guessing by the donors and their families. Have the agents walk us through their methodology for developing the assumptions and the parameters for the illustrations that depict the options for remediation.
The agents should give us a good handle on the parameters for the marketability of a policy so we don’t spin our wheels exploring a transaction that isn’t viable in the first place. This, too, isn’t particularly straightforward. There’s a certain constellation of factors involving the insured on the one hand and the policy itself on the other, all of which figure into the return the potential buyer of a policy can generate on the purchase. Fortunately, the life settlement companies have some tools that can us a preliminary assessment of a policy’s marketability and, based on buyers’ current requirements for return, what kind of price a policy might fetch on the market.
The agents should tell us how they would work with our investment people to build a model that compares the economics of keeping and supporting a policy through at least life expectancy to selling it and reinvesting the proceeds. The purpose of the model is to give everyone an idea, and that’s all it is, of how many years it would take for the sale and reinvestment to net more money for our organization than continuing to support the policy and collecting the death benefit.

Dealing with the Donors

Undoubtedly, a donor and family hearing about all this for the first time could find it somewhat opaque and troubling. So, the agents should give us an outline of a suggested presentation to the donors and families that includes at least these points:

The director shares these preliminary thoughts with the CFO, who’s comfortable that the director has not only set the stage for substantive conversations with the agents but, even more importantly, set the stage for conversations with donors and families that are well-structured, relationship-sensitive and responsive to the concerns that anyone would have about having a large policy on their life being sold to a stranger.

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