Your 75-year-old client tells you she no longer wants her $1-million life insurance policy — and, she wants to stop paying premiums. She’s heard she can donate the policy to a charity that will take ownership and pay the premiums for her. The charity gets $1 million in death benefits (minus its premiums paid), and your client gets a tax receipt for the fair market value of the policy.

Sounds good, doesn’t it?

A Toronto-based registered charity, LifePoint Foundation Canada, certainly thinks so: it incorporated in November 2014 for the sole purpose of facilitating life insurance donations.

Here’s how it works. A donor signs her policy over to LifePoint, which becomes owner and beneficiary. LifePoint then takes over premium payments, and the donor receives a tax receipt for the policy’s fair value. When she dies, LifePoint receives the death benefit and eventually transfers it, minus premiums paid and administration fees, to her end charity of choice.

As far as can tell, it’s the only charity of its kind in Canada — and there may be good reason for that.

A months-long investigation into donations of life insurance has revealed four reasons to tread carefully (click each point below to go directly to that section of the story):

  1. When using a middleman, the donation to the end charity can happen years after the client dies.
  2. An ownership transfer could be blocked by the insurance company.
  3. Insurance lapses may not be as common as people think, so a strategy that creates a pool of policies may not work.
  4. There are simpler options that, while they may result in fewer dollars going to the end charity, expose both you and your client to less risk.

Each of these points has implications for all insurance donations, and we’ll dive into them. But first, let’s look more closely at LifePoint.

How LifePoint works

Dale Toney, president and founder of LifePoint, says he founded his organization in part because many charities are hesitant to accept life insurance donations if they’ll have to pay the premiums.

“It’s actually a really significant risk for them to take it on,” says Toney, whom we reached at his home in Houston, TX, “because they don’t know how long this [donor] is going to live.” Several charity experts we spoke to agree that non-profits are risk-averse in this area.

Enter LifePoint as middleman. “The goal is to build a portfolio of similar-sized [policies] and similar age of insureds. We end up having a mortality pool. The earlier deaths help supplement the ones that we’re having to pay longer for.” LifePoint’s FAQ page refers to having “aggregate[d] together thousands of insurance policies.”

To that end, says Toney, “We are now actively marketing in and around the Toronto area, looking for insureds [who] have these policies that they no longer want,” with advisors being stage two of the campaign.

In a release, LifePoint director Brent Babcock states the strategy is viable because “over 80% of Canadian seniors allow their insurance policies to lapse, representing billions of dollars each year. LifePoint puts idle or would-be-lost money to much better use.” Ideal donors, the release adds, are at least 70 and their policies have minimum death benefits of $25,000.

“We’re trying to redirect as much money to charity as we possibly can,” says Toney. “I believe in North America it will be upward of $1 billion or more.”

Toney can say that, because he also serves as CEO of LifePoint Charitable Endowment, a Spring, TX-based Section 501(c)(3) organization that’s been around since 2008.

So, what issues are there?

1. Donation to the end charity isn’t immediate

As of March 9, 2016, Toney says LifePoint (Canada) only has “a few” donated insurance policies, saying one such policy resulted in a $198,000 tax credit for the donor.

So, if LifePoint’s insurance pool is relatively small, and no donor has died yet, how does it pay the premiums? Loans from other charities, says Toney (he declined to name them, citing their request for privacy), and donations. He says the interest rates on the loans “varies from 5% to 8%.” LifePoint’s FAQ page mentions “millions of dollars at our disposal.”

After a donor dies, he says, LifePoint will pay “a small sliver” of the net death benefit to the donor pool’s named charities. “They get a little trickle,” he says, and then the charities “get a little bit more each year” on a pro-rata basis.

Toney expects LifePoint to make its first disbursement “three to six years” from now, depending on the size of the pool. “We’ve got to collect those death benefits in order to then redistribute them. So we’ve got to be able to pay back the money that we’re renting, we’ve got to pay more premiums, and we’ve got to pay out dollars to charity.” He says LifePoint will limit its overhead to “less than 5% of our budget.”

He explains the end charity would get the full donation over a “20- to 25-year period — this is roughly how long it takes to distribute all these dollars, because some of these guys are going to live to 100.”

If the donation pool is big enough, he adds, named charities could get their share while their donor is still alive.

Toney says LifePoint hopes to give 60% to 70% of a death benefit to the end charity. “So if they donate a $1-million policy to us, we believe 60% to 70% of that death benefit will ultimately go to the charity they’ve named.”

But there’s lag time. While no policies have matured in Canada, Toney says a donor to his analogous American charity, LifePoint Charitable Endowment, died “about a year and a half” ago. The donor’s named charity has not yet received the death benefit, and Toney estimates it will “probably [be] about three more years” until that charity receives a distribution. He confirms LifePoint Charitable Endowment (U.S.) has not yet made any disbursements to end charities, “which is expected in our model.”

Charities, in general, don’t usually receive the proceeds of a death benefit incrementally unless the donor specifically requests it, says Jack Bergmans, founding partner of Bequest Insurance in Toronto. “Say there’s a food bank, where they want to make sure there’s $100,000 for 10 years, rather than giving them $1 million today. It can be a mindful way of doing it,” he says, adding that such requests are usually employed through annuity settlement options. But, more typically, “the proceeds would go to the [end] charity and they use it as they see fit or per the donor’s request.”

We also asked a charity expert (who requested anonymity) about best practices for this type of donation. He calls life insurance “one of the most transformational gifts that exist because of the ability to multiply the original amount paid for a policy. The Canada Revenue Agency has provided guidelines about how to manage these donations; proper agreements should be drawn up before a donor enters into an arrangement, so you know every step of the process and the timelines involved before [the donor] dies.”

Does LifePoint’s paperwork extend beyond the change of ownership form for the policy? “Not really,” responds Toney. “They [the donors] name the charities they want to benefit, but beyond that, there’s nothing else to do.” There are also disclaimer forms explaining the process that donors must sign. There does not appear to be a legal agreement between LifePoint and the donor’s end charity.

When asked what accounting or recognition LifePoint plans to provide to the donor’s estate, Toney says, “To be honest with you, I don’t know.” With the U.S. death benefit, “We did not create some sort of noise about it.”

And what about the end charity? Adam Aptowitzer, an Ottawa-based charity lawyer with Drache Aptowitzer LLP, says, “The end charity should be involved in the donation of the insurance policy to the intermediary so [the end charity] can confirm with the donor that the money will be going to whatever the donor wants, and that after the policy matures, the donation will occur on a timeline that both sides are happy with.”

We asked Toney what the end charities are told. His response: “Our plan is to notify charities they’ve been named. […But] it’s not fair to tell them a number and for it then not to be that number. […] We’ve talked about hav[ing] an annual letter that would [let] various charities know what their position is in the fund. […] What we don’t want to do is create a scenario where [charities ask] ‘When’s that coming?’ and be nagged by that all the time.”

Up until at least March 3, 2016, LifePoint’s website displayed the logos of eight well-known charities. When asked about LifePoint’s relationship with those organizations in November 2015, Toney told us, “Those are just charities that folks have mentioned to us that would be good places where they’d want to donate their policies,” and that none had received anything from LifePoint yet.

As of March 6, 2016, those logos have been taken down.

Go to the next page to see why the ownership change isn’t easy.

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