Confused about life insurance policies? Me, too.


This is coming from a lawyer/planned giving specialist with 20 years experience in the business.  I even had a NY life insurance license (which I never used) and I am still baffled when it comes to life insurance.

So why the post?  I finally got some clarity from a good friend (who I met when taking the insurance course!) and I thought I would try to pass it on to the blog readership.

Here are the basic (slightly altered, of course) facts I had to examine for a client:  woman in early 80s  donates a universal life insurance policy with a death benefit of $300,000.  She has been paying for a really long time and it has a cash value of around $50,000.  But, she is not in a position to donate funds to help the nonprofit cover remaining premiums.  The insurance company gave the nonprofit a few options:

  • Don’t pay any premiums, lower death payout to $200,000, and if she dies within 5 years you win the $200,000.  If not, you lose.  (make a nasal buzzer sound to nix this idea)
  • Pay $15,000 a year until age 95 and if she dies by age 95, you win the full $300,000. If not, you lose.  (make the nasal buzzer sound again! That would mean nonprofit “invests” up to around $200,000 with a chance – just a chance – to win $300,000.)
  • Pay $9,000 a year until around age 90 – around a $100,000 “investment” to win $300,000 if she doesn’t make it to age 90.  If she makes it past 90, you lose.  (another buzzer sound, please!)
  • Lastly, cash in the policy today and walk away with $50,000.  (this sounds like the most reasonable course of action at this point for the nonprofit!)

This was a very disturbing scenario to me.  What happened to all of the premiums she paid over the years – well more than $50,000 worth!  And, if she lives too long, nonprofit gets nothing!  What kind of “investment” is that?  Why in the world would a nonprofit essentially bet on their donor dying like this?

So I called my former insurance course buddy and asked for some clarity.  What he explained to me is this:  universal life insurance is really nothing more than a series of term policies with a savings component (that could grow and eventually spin off enough interest to cover the cost of the term insurance).  Part of your premium payment pays for the current “term” cost of insuring you and part gets saved (with some guaranteed level of interest attributed to your “savings”).  During the early years, more of your premium is going into the savings part because the cost of your “term” part is less because you are younger. Opposite when you are older.  When they create the plan, they pick an age and pick a flat annual premium that will cover the cost of the policy until the desired age – but not necessarily later.

In the scenario I described, I suspect that either the premium was on the lower side and didn’t create a big savings account (cash value) or the premiums were only to a younger age than 95 or perhaps bad investment markets didn’t help either.  In any case, this policy on its face is not a great investment for the nonprofit because the cost at this point to maintain (or extend years) is really high.  So high, that if they chose to pay the higher amount, the policy would still be eating into its cash value to maintain the $300,000 death benefit – to the point where there would be no more insurance past age 95 even though you paid higher premiums over last 10 years or so.

So now I understand those darn illustrations which show premiums up to age 90 or 95.  Really, it is just eating itself up because the cost of the “term” part is so high at such ages. I think this woman’s insurance agent created a policy with a lower premium to a younger age (90 or 92) because she could not afford a higher premium.  And, we see by trying to extend the policy to age 95, not only do we almost double the premium but it is still not enough to keep it going past age 95.

I think this shows us why fundraisers desperately need independent insurance professionals to advise on insurance situations.  These policies are tricky and insurance salespeople often don’t highlight the parts that would cause doubt in the buyer’s mind.

By the way, I suggested strongly in this case to see if the donor really can’t commit to helping offset the insurance premium costs to keep her policy in force.  Let’s say she donates $5,000 a year to help the nonprofit keep the policy in force.  That would change the thinking process dramatically.    Without it, the nonprofit has no choice, as far as I can see, to cash in the policy.


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