for today: It usually takes me more than three weeks to prepare a good
impromptu speech." -Mark Twain ______________________________________________________________________
Reinsurance Right for Your Gift Annuity Program?.....I am devoting
this entire newsletter to respond to the numerous inquiries I have received
about reinsuring gift annuity agreements.
Markets across the globe are experiencing tumultuous economic challenges and this is effecting gift annuties. Most gift annuity pools have lost between 30 - 50% in value. The US stock market as measured by the Standard and Poors 500 index is down to a 12 year low.
Now is a prudent time for boards and staff to examine your gift annuity investments and if necessary take corrective actions.
Reinsurance Is a Risk Management Strategy..... Charitable gift annuity agreements have two major risks. First, there is a longevity risk that donors will live too long. Second, there is an investment risk the gift annuity assets will not earn a sufficient return to cover payments before the assets reach zero. If gift annuity assets reach zero the charity is still responsible for payments until the death of the last income beneficiary. These payment must come from other invested assets or current gifts. Investment risk is greatest for annuitants under age 75 while longevity risk is greatest for those over age 75.
Gift annuity agreements may have been written when the investment return assumptions were considerably greater then the current net investment return of 4.25% built into the recently released February 2009 ACGA rates. One immediate problem develops when the current contracts were written when the investment return assumptions were considerably higher.
It may be a good time to review your portfolio of investments in your CGA pool to determine if you have the right investment strategy for this particular time which is very difficult. This may be an excellent time to review your gift annuity policies, especially examine the maximum size of contracts you will accept. This is the time to build gift annuity reserves by retaining the proceeds from terminated unrestricted contracts. It may also be the time to revisit with all annuitants and see if they are willing to give up their income (it may be a small portion of their overall income, and they are certainly older with a shorter life expectancy) by terminating their contract.
Using a gift annuity reinsurance strategy the longevity and investment risks are transferred to a commercial insurance company. Your charity receives a current gift equal to the difference between the cost of the reinsurance and the gift made. In an environment where current cash is needed to support programs and campaigns a gift annuity reinsurance strategy may be an excellent solution.
Gift Annuity Rates: a Quick Review.....The current gift annuity rates for one and two life immediate payment agreements (February 2009) are based on the following assumptions. 1) Female life expectancy, using the Annuity 2000 life expectancy table, set back two years to compensate for the fact gift annuitants live longer than the normal population. (It has been reported in some research the typical charitable gift annuitant lives 6 years longer than the Annuity 2000 life expectancy table). 2) Investment assumption of a net return 4.25% after administrative expenses of 1%. 3) Using the ACGA rates a charity meeting these assumptions should expect to receive a gross residuum of 50% of the initial gift asset on their pool of annuitants.
Cost Considerations.... Current quotes for reinsurance of gift annuity agreements show a cost of 65% to 75% of the initial gift amount. This means your charity receives 25% to 35% of the gift as a current cash contribution. Your charity can decide what to do with the current cash but I would recommend investing the amount until the death of the annuitant(s). Your target is to have the funds compound so that your can match or beat the anticipated 50% residuum built into the ACGA rates.
If you are concerned your donor may die early and you will not receive a fair return the charity might consider a installment refund commercial annuity rather than an immediate life annuity. With an installment refund annuity (which costs more) the annuitant is guaranteed to receive a set number of payments and if the donor dies before all the payments are received the charity receives a lump sum payment of the balance of the payments.
Which annuity contracts may be in trouble?..... 1) Any contract written since the start of the stock market slide which began in October 2007 has experienced negative compounding. By that I mean the assets backing the annuity have decreased while funds have been withdrawn (from the declining base) to make the annuity payments. 2) Annuitants with agreements who have lived longer than their initial agreement life expectancy are probably in trouble. 3) Annuitants where the donor has been generous to a fault and the gift annuity assets represent a large percentage of the total gift annuity pool may present a significant risk. 4) Annuitants where the FASB liabilities are greater than the market value of the gift annuity assets may be problematic for exhaustion of the underlying assets. The probability of exhaustion may be examined using Monte Carlo analysis.
Should you do 100% gift annuity reinsurance? .....Probably not unless your board is extremely risk adverse. You do not want to reinsure unhealthy gift annuitants or those who may become unhealthy over time. If the typical gift annuitant is a 77 year old female who contributes $17,000 cash (ACGA rate 6.6%, life expectancy 11.20 years) you may wish self insure all agreements under age 77 since the assets should have an opportunity to grow over time, especially considering the currently low asset values. These assets should experience one or two major economic cycles which would contribute to enhancing growth possibilities.
One Key Factor to Keep in Mind...... If your gift annuity policies require reinsurance the charitable contribution deduction the difference between the initial gift amount and the cost of the reinsurance. This will be different than the deduction for a non-reinsured annuity agreement. For further insights into gift annuity reinsurance strategies browse the library at Charitable Solutions LLC.
A Final Thought...... If you have a gift annuity agreements where the market value of the asset has increased since the initial gift consider guaranteeing a return to your gift annuity pools by reinsuring all future liabilities while providing current cash for your programs.
If your charity would like to explore reinsurance possibilities simply contact me and working with my National Board of Advisers we should be able to offer some objective analysis and possible solutions or send me an e-mail of your interest.
From the Partnership for Philanthropic Planning (formally NCPG)
Estate Tax Proposals Expected Soon
Sen. Max Baucus (D-MT), Chairman of the Senate Finance Committee, will soon propose legislation, which would make permanent key features of the 2009 estate tax rules (i.e., a $3.5 million per spouse exemption and 45% tax rate). President Obama is expected to include a similar estate tax proposal in his budget plan.
In addition, the Center on Budget and Policy Priorities, a nonpartisan policy organization in Washington, recently issued a report urging Congress not to lower the estate tax below 2009 levels. The report states that at the 2009 levels, which set the rate at 45 percent and exemption levels at $3.5 million per individual, fewer than three out of 1,000 people who die will owe any estate tax. The report also points out that a meaningful estate tax is an important incentive for charitable giving and that reducing it below 2009 levels would weaken this incentive and likely produce a drop in charitable donations.
The estate tax is set to be repealed in 2010 and then reinstated in 2011.
office: PO Box 3335, 15 Pinewild Drive, Pinehurst, NC 28374
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