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Re: Life Insurance Premiums

  • 1.  Re: Life Insurance Premiums

    Posted 6 days ago
    Hi, all.

    Our institution is owner of a donor's hybrid term-life insurance policy of which we are sole beneficiary.  It has since lost most of its cash value, so premiums must be paid to keep it in force.  Our current practice is if a donor elects to make a gift to our institution to offset the cost of the premium, we designate it to a special fund called "life insurance premium" expressly for this purpose.  The donor is then issued a receipt for the gift.

    Our business office has shared that if we give credit to do the donor (I am in inferring they mean a receipt for a tax-deductible donation) for their premium payment as a gift, then the cost needs to be expensed to the general development budget.  However, if we do not give them credit, then we can expense it to the life insurance premium fund and the two would net.

    This is all new to me so I am a little out of my level of expertise with this, although the expensing rules shared by our B.O. could be due to GAAP policies of which I am simply not aware.  It seems to me that in this scenario, the Development Office carries the burden of covering the cost of the premium if we provide the donor with a tax-deductible receipt (which we do).  I suppose my first question is: is this an Advancement Services issue, or more so an internal politics issue of cost centers for expenses related to insurance premiums?  Secondly, if anyone has any processes they can share of how they work with their Business Office to accept donor gifts specifically to offset the expense of insurance premiums, I would appreciate it!

    Thanks,
    Amanda

    ------------------------------
    Amanda Shinholser
    Director of Advancement Services
    Bryn Mawr School
    shinholsera@brynmawrschool.edu
    ------------------------------


  • 2.  Re: Life Insurance Premiums

    Posted 6 days ago
    Amanda, these hybrid policies are not tax-deductible.  Only whole life policies are.

    Now, if you determine as an institution that you want to take out term policies on individuals, that's your business (but not really a very good investment).  But if that's your investment strategy, then it is your financial obligation to maintain those premium payments - not that of a donor.

    If donors wish to make annual fund contributions in support of your operating costs, that might include these policies, that is fine.  But ultimately, you assume the risk and responsibility for these investments.

    For my money, I'd cancel any of these policies and let donors make outright gifts you can use for immediate purposes.

    John

      
    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987






  • 3.  RE: Re: Life Insurance Premiums

    Posted 6 days ago
    Thank you, John, for the quick answer!  We assumed ownership of this policy before I arrived, so I do need to do some additional digging here.  That said, with the immediate issue of receiving a check to offset the cost of the premium (which I understand we are certainly not owed by the donor), it sounds like having a designated fund for life insurance premiums is not necessary and that such gifts should be directed to our AG fund?  In most of what I have come across online, it seems like a gift from the donor to the AG fund is most common in this sort of scenario, but I was not sure if there was some sort of GAAP rule for having a separate fund on the G/L for life insurance premiums (and thus, a corresponding fund in Raiser's Edge) in which to direct these gifts.  Putting these donor reimbursements (for lack of a better term) into the Life Insurance fund has been a practice in my school for years (and one I am admittedly not familiar with), so I am just trying to sort out what is 'different' or 'new' to me versus what is actually bad practice.

    Amanda

    ------------------------------
    Amanda Shinholser
    Director of Advancement Services
    Bryn Mawr School
    shinholsera@brynmawrschool.edu
    ------------------------------



  • 4.  RE: Re: Life Insurance Premiums

    Posted 6 days ago
    There are many ways to approach this.  However, I will emphasize that many institutions now do what they can to decline gifts of life insurance policies.  These were considered viable back in the 1980s when interest rates were high.  But there are many better investment strategies we should be discussing with donors.

    One thing is pretty standard, though, and that is only whole life policies are excepted.

    From an accounting perspective, when an institution is the owner and beneficiary of a whole life policy that is not fully paid up, and where the donor wishes to supply the premiums, it is quite common for the premium payment to go into the same fund established for the policy.  However, should the donor cease payments, many institutions opt for cashing in the policy.

    In this case, which I hope is very isolated, you have every right to cancel to the policy as the owner.  That's an investment decision.  However, if you feel you need to keep it up, then where the premium payment goes is up to you and the Business Office.  What is critical to know is that the donor has no obligation to maintain payments.  YOU own the policy.  Therefore premium payments are your liability, not the donor.

    John

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987







  • 5.  RE: Re: Life Insurance Premiums

    Posted 6 days ago
    Thank you!  Your insight has been very helpful!

    ------------------------------
    Amanda Shinholser
    Director of Advancement Services
    Bryn Mawr School
    shinholsera@brynmawrschool.edu
    ------------------------------