IBC & Charitable Giving
A Thanksgiving exploration of how to give the gift of capital creation.
This article expands on a topic I first raised on this blog three years ago (this one).
That article highlights some of the features of dividend-paying whole life insurance and observes the fact that non-profit entities are not subject to income tax, and therefore, that non-profits can own Modified Endowment Contracts (MECs) without suffering the tax consequences associated with them. In particular, I explained one specific form of a MEC: the single-pay policy (i.e. Single Premium Whole Life or SP Whole Life).
We’re about to go way beyond that.
I want to suggest two things to you.
First, if you donate to a non-profit organization, you need to consider giving life insurance built for the IBC instead of — or maybe in addition to — your cash donations.
Second, if you are a financial decision-maker at a non-profit organization, you need to consider institutional IBC, that is, as the core financial philosophy of your charitable enterprise.
If it’s a good idea for the individual to systematically, intentionally accumulate and to optimally deploy capital over his lifetime (it is), then it’s also a good idea for the institution.
Why Gift IBC
Think of a cause you care about. Think of the non-profit that you already give to and/or work with that serves that cause.
Think of all the people that work for or volunteer with that non-profit. Think of the individuals who operate and make decisions for the non-profit. Think of the people who have in the past and will in the future work for, volunteer with, and operate the non-profit.
Think of the operations of the non-profit. Think of the buildings they rent, buy, and build. Think of the special projects and fundraisers that pop up in a given year and over time. Think of the projects the non-profit would like to do, but lack funding for. Think of the small, mundane things that the non-profit would like to do, but also lack funding for.
Think of the non-profits who stopped operating because the donor base moved away, changed their giving preferences, or passed away. Think of the causes that are neglected because the money to get the job done just isn’t there.
If you’ve already implemented the IBC, you already see a relationship between premium and death benefit. You already see the liquidity (cash value growth) relative to your annual premium outlay early in the life of a contract.
Imagine you ran the non-profit you thought of above.
Imagine the non-profit owned insurance on some of those significant, regular donors. Imagine there were policies on those key employees — the elders, pastors, presidents, CEOs, and CFOs. Imagine that every one of those policies was built for ‘banking.’ Imagine you had a pool of capital that grew every year on a guaranteed, compounding basis. Imagine accessing that capital via policy loan without having to spend tens of hours collecting internal data and filling out grant requests. Imagine receiving these funds without all the use restrictions and reporting requirements that government and public charity, foundation, and donor-advised fund grantors routinely impose. Imagine that in time, God will call some of your insured employees, donors, and partners home. Imagine relatively regularly, recurring cash windfalls flowing to your non-profit with essentially zero reporting requirements or use restrictions.
OK, now what kind of non-profit were you imagining?
Is it your church? A school? A college? An after-school program? A youth advocacy organization? A domestic violence shelter? A homeless shelter? A mentorship organization? Your family foundation?
Consider everything you just imagined as hypothetical leader of your chosen non-profit happening within every single type of non-profit you can think of.
James Neathery has said that if IBC was accepted and practiced by the church — and by extension, all non-profits — it would change the world.
This is why you ‘give IBC.’
Most of us who tithe, offer, and/or give do so in cash. Some of us may have it in our will that certain property — assets — will go to a specific non-profit when we’re called home.
Cash earmarked for premium in life insurance is preferable to unrestricted cash donations for the same reason that you should finance purchases with policy loans.
That is, it is better to leverage capital accumulated in assets than to pay cash.
Why? Because cash expenditure is capital liquidation.
By spending cash that otherwise could have been used to accumulate collateralize-able capital in an appreciating asset, we are giving up all of the future purchasing power we would have gained otherwise. The cost of cash expenditure is the present value of all future purchasing power that would have accrued to the individual had that cash first been used to generate equity in an appreciating asset.
I’m not telling you anything different from what Nelson Nash explained and illustrated in his book Becoming Your Own Banker.
If it’s better to accumulate collateralize-able capital than it is to spend cash (liquidate capital), then it’s better to give the gift of IBC-style life insurance than to donate cash to our favored non-profits.
I would go so far to say that giving money on the expectation it be used as premium into an IBC-style whole life insurance policy is a natural byproduct and extension of your passion for the cause you care about.
If you believe in the mission of your chosen non-profit, you should want them to as well-equipped financially — well-capitalized — as possible.
IBC is the way to do that.
How to Gift IBC: A Donor’s Perspective
“Giving life insurance” built for the IBC actually works like this.
You’re going to donate what I’ll call “earmarked” cash to a non-profit. Usually, this generates a tax deduction for you personally (or your company — whichever is doing the giving), just like normal. The non-profit receives the donated funds in its bank account. The non-profit then uses the donated funds to pay premium on one or more life insurance policies. These life insurance policies are the property of the non-profit entity. The non-profit entity — that is, the individuals authorized to execute financial transactions on behalf of the non-profit entity — get to exercise all the same authority over the life insurance policy as an ordinary individual owner of life insurance would (i.e. as you do over your policies). This includes determining the beneficiary(ies) and contingent beneficiary(ies), taking and repaying policy loans, choosing the dividend election, exercising non-forfeiture options, and so on.
Here’s one way to set this up.
This is the case of where the donor is the proposed insured on the policy.
I’m going to use myself as an example because I’m the only one on the internet writing about this.
You’re a donor to a non-profit entity. You contact me. You already have life insurance in force on your own life because you’ve read Nelson Nash’s Becoming Your Own Banker, you understand the deep need to own and control the banking function in your own life, and you’ve demonstrated that understanding by taking action, acquiring one or more life insurance policies built for the IBC where you are the insured and your dependents are the beneficiaries, and you’re paying premium.
Because you have life insurance in force, you automatically demonstrate to underwriters that you believe in the power of permanent life insurance. Therefore, the underwriter is willing to evaluate applications for a policy where you are the insured and proposed premium payor, but someone (or something) else is the policy owner and where someone (or something) other than your dependents is the proposed beneficiary.
As your agent and advocate in the application process, I explain all of this to the underwriter in terms acceptable to him and to the company.
In particular, I’ll explain how you intend to donate money earmarked as premium for the proposed policy to be owned by the non-profit organization. We’ll explain how that non-profit organization is both the proposed policy owner and the proposed beneficiary.
The underwriter will be willing to consider this application so long as the non-profit entity has an insurable interest in you — the donor and proposed insured.
Insurable interest refers to the idea that if the insured on a policy passes away, the beneficiary on the policy (typically the same person as the policy owner) would suffer loss.
In the case of charitable giving, a non-profit entity has an insurable interest in a donor if that donor has established a so-called pattern of giving. Typically, a pattern of giving is a record of three years of donations to the non-profit. A non-profit entity also has an insurable interest in a donor if that donor is materially involved in the operations or conduct of the non-profit. With respect to the application, the non-profit’s position is “if we lose this individual, we’ll either lose a stream of dependable donations and/or an important person for our operations.” In both cases, this is insurable interest. I justify the magnitude and nature of the insurable interest in the application using information you provide to me.
(I always do this, and most people don’t know this, but many agents don’t do this even in ordinary applications.)
All of these elements will be established before the application is even submitted. The underwriter will receive the application and my explanation of why the policy is appropriate. We’ll assume the underwriter agrees, approves the application, and that the company offers the policy for which we’ve applied. The insured (you) and our point of contact at the non-profit with signing power at the non-profit will sign as the owner in order to take formal receipt of the new policy.
The policy is now in force.
The non-profit now owns an asset, a significant portion of the value of which is essentially immediately liquid. That is, it’s not like the non-profit wouldn’t be able to deploy any of the purchasing power normally associated with a financial gift in the very near term. Just like a policy you would buy for yourself, cash value is generated as soon as PUA premium is paid, and that cash value can be leveraged via policy loan (so long as the policy comes from the right company, which it will). The non-profit decision maker may even have a project in mind that he will use the policy loan funds for before we even submit the application.
The value of this asset will grow on a guaranteed basis, with compounding over time.
After a period of years, let’s say five, the annual cash value growth will exceed the annual premium payment on the policy (just like it will/does in yours). In other words, the money you donate that will be used as premium will now result in an increase in purchasing power available to the non-profit in excess of what you donated.
In a sense, you’ve multiplied the purchasing power of your donation by earmarking that donation for premium.
The degree of magnification of the purchasing power of your donated money (to be used as premium) will continue to increase, and it will increase at an increasing rate. This is the same thing as saying that annual cash value growth will become greater and greater than the annual premium paid into the policy over time. As it goes in your own policy, so it goes for the one you’re paying for that’s owned by the non-profit.
This approach of “gifting IBC” where the donor is the insured works well because very little is required on the part of the decision maker at the non-profit. The non-profit decision maker doesn’t have to participate in a paramedical examination. They don’t have to “find the money” to pay the premium.
All they have to do is be willing to learn how to manage the policy.
Of course, the more buy-in and understanding from the non-profit decision-maker, the better.
But with this method, most of the work is done by you and me — the agent and the donor.
What is required from the non-profit decision maker? They need to understand what life insurance is, who the parties to the contract are, and what the value (pun intended) in going about this whole process is. The best case scenario is that the non-profit decision-maker reads Nelson’s book, and may even decide to implement IBC in his or her own life, and/or on a larger scale within the non-profit outside of just the one policy insuring you (to be discussed below).
With this general outline in mind, we can imagine other application and policy scenarios.
For instance, a donor may be the premium payor on a policy, but the insured may be a different key employee at the non-profit. This involves one greater degree of difficulty, since the key employee will need to sign the application and the policy, and participate in the underwriting process. The additional difficulty involved can be mitigated with basic things like asking nicely and, potentially, offering a performance bonus financed by an eventual policy loan.
Charitable Activity on Steroids: Institutional IBC
I have a few clients who have close relationships with decision-makers at the their chosen non-profits.
Most decision-makers at non-profits are hyper-allergic to financial salespeople. And who can blame them?!
On the one hand, these decision-makers bear the weighty responsibility of proper stewardship of resources entrusted to them. On the other hand, concentrated capital is always a target for the less savory elements of society. For this reason, even genuine advisors with a heart for serving the mission of a particular non-profit with genuinely good financial ideas will be automatically lumped together with the undesirables.
The likelihood of a non-profit decision-maker listening to me about what to do with their organization’s money is remarkably small. I look forward to the day that someone defies me on that, but here we are.
Therefore, it’s much more difficult for IBC to be adopted by the organization itself, rather than as a byproduct of one particularly-motivated donor’s giving. I’m talking about the scenario where non-profit leadership looks at its annual cash flows and decides to implement IBC throughout the non-profit, in just the way you would implement it in your own life.
However, with this grand level of scale, the result in terms of capital generation are proportionately greater too. By the way, thorough, institutional implementation of IBC in a non-profit setting doesn’t have to happen all at once. It’s OK for total implementation to remain a goal to pursue over time.
That said, there are a few prerequisites to consider in the context of institutional implementation.
First, we need a single financial decision maker at the non-profit. If there are committees involved, do everyone a favor, and forget it now. It’s hard enough for a single person to set aside preconceived ideas and consider what’s possible with IBC. It’s essentially impossible for a committee. Remember, God so loved the world that he did not send a committee.
Second, you need to have a legitimate, serious relationship with this single financial decision maker. That relationship can be personal or professional. It needs to be the sort of relationship where the individual will read a book if you genuinely ask him or her too. There are friends. And then there are friends who will read a book if you ask them to. To get an idea of how rare this is, consider whether you would read a book if one of your friends asked you to. It’s rare.
Third, the best way to get IBC implemented throughout a non-profit is for the non-profit leader to implement IBC in his or her own life.
Fourth, everyone is always on the defensive with “you should” statements. One of the best ways to share the power of IBC is simply to bring up what you are already doing in your own life and why. Some people are more comfortable than others with this, since it can involve disclosing specific dollar amounts. I must add, though, that vulnerability and transparency are prerequisites for trust.
Perhaps the very best way to communicate to a non-profit decision maker how they might consider managing their own finances is to first start your own non-profit, implement IBC in it, and then share that story. This is entirely possible, and in fact, I have a few clients considering this very strategy. This is a story for another time.
In the event that a non-profit decision-maker wants to implement IBC throughout the enterprise, he or she and I would have a series of preliminary, educational, advisory conversations just as I do with all of my clients. We would walk through how to determine what the correct premium outlay across the enterprise would be, who the policies would insure, how the insurable interest would be justified, how the policies would be managed (just as I do with my other clients), and of course, what can be achieved as a result of IBC implementation, be it partially or institutionally.
The result would be a very clear picture of the kind of capital the non-profit would generate. The word “compelling” does not even begin to describe the power of a system of policies like this.
There is much more to say on this subject.
I’m often asked for “the” article or “the” video answering a certain question or addressing a certain topic. Sometimes I think I don’t do a good enough job of explaining how entangled a topic or subject that seems well-defined and distinct is with other elements. So please understand that this is not my final word on the subject.
Hopefully, though, you have a more clear, precise idea of how IBC in the non-profit setting works.
I didn’t plan to finish and publish this on Thanksgiving. But it’s fitting. Gratitude and giving go hand in hand.
If you’re a giver (and I know for a fact that many of my readers are), you should consider ‘giving IBC’ be it for this coming Giving Tuesday, as part of your calendar year-end tax planning-related giving, or just as part of your regular tithing and offering.
I’ll leave you with this. The parable of the talents is a story of the virtue of capital creation. You already understand how to create capital in your own life with IBC.
Now, you have the opportunity to share that with the charitable organizations you care about.