Creating a Successful Life Insurance Program

By George Willock, Director of Trusts, Estates, and Gift Planning at Auburn University

Sometimes in life there is a little difference which makes a big difference. Many times that little difference can be the determining factor in whether we enjoy success or failure.  Auburn University's life insurance program is successful due to a little difference that has reaped great financial rewards. 

When I took over as the Director for Planned Giving at Auburn, the insurance policies were handled by our accounting department. By the start of my second year I had earned enough trust with the Director and Assistant Director of Accounting that they asked me to review the insurance policies and if I was interested to continue to handle them. I was told we had over 30 policies.  Completing my review, I found that we actually had 8 policies worth a little over $3 million in face value. Today, we have over 230 policies with a face value of just over $80 million and a cash surrender value of $4.5 million. Additionally, of the 230 policies, 95 policies are self-paying with a face value of a little over $42 million. This means we have averaged over $5 million of irrevocable gifts per year over the past eight years since the inception of our life insurance program on June 15, 2002.  We have worked with over 70 professional financial representatives of which approximately 25 are actively partnering with us to create more life insurance gifts.

Beginning in the spring of 2002 I used facts and some well-known theories to develop the framework of successful life insurance program for Auburn University. Those facts and theories are as follow:  the Theory of Probabilities and the Law of Large Numbers, people do what they get paid to do, rating companies' information allow us to control the quality of the insurance companies accepted into the program and thereby allows us to control the quality of agents, we control the interest rates on each policy; and we keep the management and servicing of these policies within the planned gift office.

The first step in testing my proposed framework was to contact five financial services professionals whom I had gotten to know during my first year with Auburn, asking them to be part of a short term task committee to review the framework and then to put a life insurance gift acceptance policy together to which we would strictly adhere. 

The Theory of Probabilities and the Law of Large Numbers are the underlying principles of life insurance and they are the basis of our insurance program. Probability theory is a branch of mathematics which is concerned with the analysis of random phenomena. By pooling a large number of homogeneous exposures, an insurance company can predict, with a given degree of accuracy, the probability of a policyholder's death at a given time. Couple the Theory of Probabilities with the Law of Large Numbers, which states that the larger the pool of people, the more predictable the amount of losses will be in a given period and instead of having random statistical values we have a mathematical predictor of outcome. Now, in practical use what this means is that when a charity accepts insurance policies as gifts from their donors on an as-given-by-the-donor basis, the charity is actually gathering random phenomena but not in significant enough numbers to be of mathematical value. Further, since there is no pooling of large numbers of these policies, the charity is in the disadvantageous position of being controlled by the policies and the agents who marketed them. By our concentrating on achieving a goal of over 1000 policies, we have been able to use these two mathematical components to our advantage. We have chosen 1000 policies as a minimum because we know from actuarial science that this is the smallest number of homogeneous exposures which can be used to provide us a measured degree of accuracy of the probability of a certain number of insured donors' deaths in a given year. The second part of this formula is to know the average or mean age of our insureds. What this means to Auburn is that we can predict with a higher degree of accuracy the number of our donors of the mean age dying in any given year; and when multiplied by the average value of the face amount of all insurance policies we will have an approximate value of funds maturing to Auburn each year. For example once we have 1000 policies, if the mean age of our donors is 63 and based on the latest Actuarial Life Table the probability of deaths is 0.014759, a multiplication of these two numbers reveals that approximately 14 people aged 63 will die this year per 1000 people. Then if the average size insurance policy is $350,000 multiplied by 14 people who are expected to die, then we know the expected matured gift value will be $4.9 million.

Deciding who we want to sell policies to our alums, we determined that it is best to allow any licensed agent to work with us as long as the agent agrees to abide by the conditions of our Agent Agreement. The Agent Agreement is our gift acceptance policy on life insurance. The fact that people do what they get paid to do is behind this broad determination of with which agents we work. Agents get paid to sell for particular insurance companies of their choosing. These agents will place or sell more policies for one, or at most, a couple of insurance companies because of the commissions on new policies, the renewal commissions of those policies, and on incentives of trips and awards by the insurance companies. Therefore, we want agents to sell for the companies that provided them with the most incentives to keep them in the insurance profession and for them to be as successful in their careers as is possible. This also provides us with additional help in keeping the policies in force from year to year as the agents will be compensated by the insurance companies for their persistency in retaining their clients and the issued policies. A bonus benefit is that as our development officers work with these agents, we find that our development officers gain knowledge and skill in working with their alums and donors. 

By our controlling from which companies we accept policies to be written, we understand that we control both the quality of the insurance products and with which agents we work. There are four rating companies we utilize in determining from which insurance companies we will accept policies. These rating companies are A.M. Best, Moody's Insurance Financial Strength, Standard and Poor's, and Fitch. Within each of these companies we will accept applications to be underwritten only by companies that have a rating of the two highest rating levels. 

In determining which policies we accept, we established that only permanent policies are accepted. We were and are aware that the donor can receive a contribution deduction for the premiums paid on a term life insurance policy, but we, that is Auburn University, are not able to control this type of policy. As soon as that donor decides to stop paying the premium on the term policy, at the end of the policy year that policy would lapse and no longer be a gift. Therefore, we accept only permanent policies such as Universal Life, Whole Life, Adjustable Life, and Variable Life. Though we do accept Variable Life polices, through time we have come to accept them only if the cash value equals the face amount of the policy at age 100. These permanent policies which have a cash value within them must have an illustration that does not exceed 6% (we know this is high in today's market) or the currently illustrated interest rate as approved by the insurance company, whichever is lower. Each illustration must be approved by our office prior to the agent's presenting it to the donor and the illustration must have cash value within the policy to age 100. We have made an exception for those policies that have a guaranteed death benefit rider. 

I saw at the outset of creating this program that the administration of these policies needs to be managed by the planned giving office. This was a difficult duty to perform because at the time the office consisted of a part time (20 hours per week) secretary and me. However, I believed that success breeds success and I believed that as this program proved successful I would be able to gain upper management's support in adding administrative staff. I have been fortunate as this did occur.  Today our office has three full time administrative staff; one who is dedicated to the insurance program. The administration of our insurance program consists of working with and maintaining a relationship with our partnered financial services professionals, contacting each insurance company on each policy's anniversary date to get the latest financial statements and illustrations for review, working with our accounting department to provide all of our insurance donors with the proper annual receipting of their premiums, keeping an accurate record of all the policies, and supplying support to our development officers in maintaining and building donor relations. 

That little difference which has made a big difference for us is that in every aspect of the insurance program process, we are in control. Though this sounds simplistic, please don't let the simplicity fool you. From the time when a donor, a development officer, or an agent first tells our office of a prospective donor, someone from our office is actively involved in the insurance process. Over the years development officers, donors, and especially agents have attempted to bypass our office to gift an insurance policy to Auburn. Most times the attempted bypass was done out of ignorance of our insurance gift acceptance policy and after a few minutes of discussion a satisfactory agreement has been worked out. On a few occasions we have had to tell the donor and/or the agent that we would not accept the insurance policy due to non-compliance with our insurance gift acceptance policy.  For us, insurance has been a valuable addition to our success in raising funds for Auburn University. We look forward to the day when we will have 1000 policies and, if the current face value of $350,000 per policy holds, this will equate to approximately $350 million in face value of life insurance for a better funded Auburn University.