The non profit community is a market with which I work on life insurance strategy development as well as provide policy audit and policy management services. What I see is interesting. The institutions that you would think may have numerous policies have almost none and others that you would guess not to have many policies have scores or a few hundred. My observation is that it is largely due to the past directors and whether or not they had friends or donors in the life insurance industry.
Regardless of how many policies are owned for endowment purposes, they are seldom managed, let alone managed well. With inevitable turnover in staff, distanced relationships with donors and the poor performance of unmanaged policies over time, many non-profit directors are quite disillusioned with life insurance, don’t know what to do with what they have and certainly don’t look forward to taking on more.
The concept of utilizing life insurance as part of an diversified endowment building practice is quite sound and I will discuss the economic dynamics of this in Part II. However, as with any good idea, implementation and management is critical for long term success. I will share two stories to illustrate the importance of this.
A couple of years ago I was contacted by a college to review a policy on the life of a major donor which had been in force for a couple of decades. This is an exceedingly wealthy individual who is surrounded by the best council money can buy. However, as you will see, that really doesn’t mean a lot to this part of his planning. Over the years this individual had paid seven figures in premium into the policy with the intent of creating an endowment for the school. When I was brought in I immediately set off on performing a policy audit to determine the health and longevity of the policy relative to the health and longevity of the donor.
The short story is that the policy was performing so poorly due to continuous declines in the interest rate market and a lack of policy management, that my report to the foundation director was that the policy would not last until Christmas, let alone the life of the insured. In fact, the policy was performing so poorly that the insurance company was unable to run ledgers showing what it would take to keep the policy in force because the amount of money the policy needed to survive on a year to year basis would violate insurance and tax guidelines limiting how much money could be put into a policy. It was unsalvageable. Furthermore, it was so bad that even the life settlement market had no interest in it. The policy lapsed and was literally thrown in the garbage soon thereafter.
To add insult to injury, five years earlier the policy had $500,000 of cash value and a respected agent told the foundation director that the policy was “fine”. Unfortunately, this was never the case. Nothing had transpired in the past five years to make this happen. Five years earlier I could have shown, give or take a few months, when the policy would collapse. Instead, without a thorough audit and valid information, the policy burned through the $500,000 of cash value as well as the $50,000 in annual premiums being paid. In other words, $750,000 in cash value and cash flow was wasted which could have otherwise been directed into an alternate investment from which the foundation would realize a benefit.
Upon further review of the portfolio, our analysis showed that all but one of the remaining policies owned by the foundation would likely fail before the insured’s/donor’s life expectancies, if substantive changes were not made.
The next example is about another college which hired us to evaluate their entire book of business which consists of the better part of a hundred policies. This portfolio is a mix of whole life, universal life and variable life policies. The result of our audit process is that, though almost every single policy is underperforming expectations, some of the policies are fine, some are just hanging on and some are disasters and have no hope of ever paying a death benefit.
Without getting into the gory details, by the end of the analysis my expectation is that the portfolio of policies will be significantly smaller but it will be a portfolio of properly funded, quality policies with a known expected internal rate of return all wrapped up with an ongoing management philosophy and system.
Every life insurance portfolio of any charity or foundation I have ever reviewed represents another chapter of the same story. Though there is nothing about these charity owned policies that makes them fundamentally any better or worse than other policies, they are performing poorly because they tend to have, in my experience, even less active management than other policies.
So the mantra continues… life insurance needs to be managed like any other financial transaction.