Charitable Gift Annuities: How Much Are You Leaving on the Table?

Does your nonprofit organization already offer donors the opportunity to give through Charitable Gift Annuities? If so, is your organization realizing its full CGA potential or are you leaving a lot of money on the table? If you’re currently not offering CGAs, is your organization’s CGA potential sufficient to justify making this giving instrument available to donors and prospective donors?

In my book, Donor-Centered Planned Gift Marketing, I wanted to help development professionals answer those questions. So, I developed a “CGA Potential Worksheet” after getting some terrific insight from the legendary Frank Minton, Senior Advisor at PG Calc and former Board Chair of the American Council on Gift Annuities. In a previous post, I shared my “Charitable Bequest Potential Worksheet.” In this post, I’ll share my “CGA Potential Worksheet” with you.

First, let me very briefly explain what a CGA is. A CGA is a gift planning instrument that allows older donors to make a current gift to a nonprofit organization and, in return, receive an income for life and a tax deduction on a portion of the gift.

While an initiative to secure CGAs will enjoy greater success or less success from time to time depending on a number of variables including the state of the economy and interest rates, we can estimate what an organization’s potential is over time. To truly project how much a CGA initiative can produce, one must understand as many of the variables as possible including the nature of the prospect pool, the wealth of prospects, the age of prospects, the passion of prospects, the history of the organization, past service performance, the purpose of the fundraising effort, the nature of the cause, the community, past philanthropic performance, the marketing effort, and so on. Collectively, this makes it difficult to forecast actual results. However, one can fairly easily gauge an organization’s estimated potential given a mythical, ideal set of circumstances. The following worksheet is meant to provide development professionals with an understanding of the broad potential impact of a CGA initiative for their organizations.

While this is not a scientific forecasting tool, it can nevertheless help with forecasting by outlining aspirational targets. This worksheet looks at one of the most common, easy-to-market types of planned gifts.

Charitable Gift Annuity Potential Worksheet:

Step 1: Size of database = ________ Records

Since the core prospect market for a CGA program is people over the age of 65, you should count or estimate the number of donors to your organization who are 65 or older. Depending on your organization, you might want to include other loyal supporters such as volunteers.

Step 2: Number of records x 0.83% = ________, number of potential donors

There were an estimated 400,000 CGAs in the United States in 2010. However, this does not mean that there are that many CGA donors. Many such donors make multiple CGA donations. No one really knows how many CGA donors there are in the United States. For the sake of this exercise, we will estimate the number at 300,000. Presently, there are approximately 36.3 million Americans over the age of 65. That means 0.83 percent of older Americans are CGA donors. If you feel the number is lower, use a lower factor. If you feel the number is greater, use a larger factor. This will give you the potential number of donors for your organization given the current market penetration of CGAs in general. This does not include those who would be willing to consider, but who have yet to take action. How does your organization compare?

Step 3: ________, of potential donors x $________ = $________ potential dollars

Take the number of potential donors and multiply it by your organization’s minimum CGA value or current average CGA value to calculate the dollar potential that exists. How does that compare with your current program? If your organization doesn’t have a CGA option, use your state’s minimum CGA value.

Step 4: Summary

Number of potential donors = ________

Potential dollars = $________

After completing all four steps, you will have an estimate of your organization’s potential for support through CGAs over time. While this is not a forecast, it does provide some indication of the potential results for your organization. How does your organization’s current CGA marketing performance compare? Is the potential great enough to justify your organization investing more in CGA marketing or creating a CGA initiative if it hasn’t yet had one?

CGAs are not without some risk to charities. This is particularly true in a down economy. However, the CGA remains an instrument worth exploring. Organizations can either offer CGAs on their own or work through a local community foundation that may offer a CGA program that organizations can market for their own benefit. By considering the CGA potential for your organization and by understanding the risks and how to mitigate them, you and your colleagues will be well positioned to determine if a CGA initiative is right for your organization and, if so, how much effort to put behind it.

That’s what Michael Rosen says… What do you say?

UPDATE NOTE (9/16/11):  A correction has been made to the above worksheet. Where it now uses a factor of 0.83 percent, the original post mistakenly used a factor of 8.3 percent.  My apologies for the error.

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8 Responses to “Charitable Gift Annuities: How Much Are You Leaving on the Table?”

  1. Michael,

    The effort to quantify CGA potential is laudable, but, in my opinion, futile, largely owing to the innumerable factors at work. In addition, the advisability of conducting a gift annuity program also depends upon the ability to undertake the financial risk, which can vary greatly, actuarially speaking, from one charity to another, and the difficulties of which can be exacerbated by general economic conditions.

    I wholeheartedly agree that charities should, if at all possible, offer donors the maximum number of options for supporting their work, including gift annuities, which have enormous natural and popular appeal. In fact, I make that same point in an article in this month’s (Sept.) issue of Planned Giving Today.

    But, for organizations whose potential CGA donor base is the least bit questionable, though, or whose financial reserves are not especially robust, gift annuities can be offered through umbrella-type organizations whose missions allow it (e.g., community foundations, denominational headquarters, federations) and to whom the risk and administrative responsibility can be transferred.

    Just my two cents, as J.J. McNab would say, adjusted for inflation.

    • Jeff, thank you for taking the time to provide your “two cents.” A fundamental management principle is: if you can’t measure it, you can’t manage it. While it is certainly true that my worksheet will not allow development professionals to precisely forecast their organization’s CGA potential, it will certainly give folks an idea if they’re way off the mark. In other words, I’ve provided a very basic gauge.

      Over the years, I’ve met some pretty lazy development people who had bosses that thought they were very successful. I even talked to an Ivy League planned giving director who came right out and said, “I already raise enough to make my boss happy. I don’t need to raise any more.” Perhaps he was correct. Perhaps he was already generating an above average amount of CGAs and other planned gifts. On the other hand, perhaps not.

      While there are certainly a large number of variables that make precise forecasting difficult, if not impossible, organizations should know whether their planned giving performance is well below average, around average, or well above average. And, this measurement should be taken by comparing results with comparable organizations and comparing actual performance with estimated potential. My worksheet is offered to help nonprofit professionals take one small step down this path.

  2. Thank you for your recent post. Coming from an organization that has put a halt on offering CGAs due to the regulations and investment risk, this information is helpful as I have begun to make a case for reinstating them. While we have a healthy endowment, we do not have the unrestricted reserves that are required in the State of Illinois and we must therefore use reinsurance to offer CGAs. There are many experts out there, but I would be interested in learning from someone (unbiased) about their thoughts on reinsurance OR a program called IGAP (Insured Gift Annuity Program) that is currently being offered through Morgan Stanley and is backed by an commercial variable annuity. Bottom line is we know we are leaving money on the table, BUT we have to have our ducks in a row before we can move forward.

    • Stephen, thank you for your comments. I appreciate your interest in further exploring the issues surrounding CGAs. I apologize for not responding immediately, but I wanted to get my own ducks lined up first. I shared your concerns with others and received some interesting responses.

      Jeff Steele, of the Philanthropy Planning Center, LLC, says, “If EIU doesn’t have sufficient reserves to be comfortable issuing gift annuities, reinsurance won’t address the trustees’ discomfort. Reinsurance doesn’t relieve the nonprofit from its payment obligations if the insurance company goes belly up. We all know that, in this economy, such an event is not unthinkable. EIU would be better off having a third-party issuer, and simply being the designated beneficiary of all or part of the residuum.”

      Tom Cullinan, of Schola Donum Inc., says, “Gift annuity reinsurance is an investment decision. A charity that has insufficient unrestricted reserves has no business getting into the gift annuity business, in my humble opinion.

      “Yet, even if it did anyway, hopefully everyone reading this post knows that the charity’s requirement for reinsurance alters the income tax charitable deduction for the donor as well as the character of the annuity payments over the statistical life expectancy of the annuitant(s). In other words, one can no longer use the standard software calculations and needs to know how they really function, making the appropriate adjustments for the donor’s investment in the contract. That the calculations differ from a standard gift annuity is not necessarily a negative to the donor or annuitant(s), just another fact to be fully disclosed and explained prior to the gift.”

      Bryan Clontz, CFP, of Charitable Solutions, LLC, directed me to his firm’s online library which provides a number of free articles and a free webinar on CGA risk management that you can find at http://charitablesolutionsllc.com/library.html.

      Regarding your inquiry about the Morgan Stanley Insured Gift Annuity Program, Michael Hardy, CFP, CIMA, a Senior Vice President with UBS Financial Services, Inc., writes, “I believe that IGAP is simply an investment strategy in which the CGA assets are invested in a variable annuity. The variable annuities created in the last several years are becoming increasingly popular with mainstream America because they offer a ‘guaranteed minimum’ income stream, regardless of the underlying account value, for life. Purchased by a nonprofit organization, this guaranteed income stream could potentially offset your obligation to the donor which would effectively eliminate longevity risk. This product/strategy is not exclusive to Morgan Stanley, but I give them kudos for coming up with a way to brand it as such.

      “….and now the rest of the story…or…It’s not too good to be true, just too good to be free.

      “For the insurance company to offer this guarantee, they will collect various fees that will likely add up to north of three percent. This fee is deducted from the contract value, which is one of the ultimate determents of what is available to the charity at death, known as residuum. Compare this to the ACGA assumptions of around one percent fees, and you can reason that a tripling of the fees might have a significant impact to what remains for charity. Of course, it is up to your nonprofit organization to weigh the ultimate costs vs. benefits.

      “In addition, the payout scales at the annuity companies do not match the ACGA rates directly. For example, the vendor which is used for the IGAP illustrations (SunAmerica), offers payouts of six percent from ages 45-64 and seven percent above 65. Based on current ACGA rates, the IGAP plan would not fully offset the payout rates for donors above 78. As a result, the product would only offset the income for individuals with longer life expectancies…read in a cynical way, only those in which the annuity company could collect the higher fees for a longer time. It should be noted that SunAmerica is one of the most aggressive rate structures out there right now. More typical payouts are would be less than ACGA rates in almost all circumstances which would require a supplement from the nonprofit organization or a lower negotiated rate with the donor.

      “Another thing to consider is reserve requirements. The purchasing of a variable annuity is not ‘reinsurance,’ it is simply an investment vehicle. I’m not aware of the requirement in Illinois, but here in California the nonprofit organizations must set aside a reserve for future obligations. Given a perfect storm of future lower rates of return coupled with the higher expense fees of the annuity, it is not inconceivable that at some point the contract value might be less than future liabilities, or even wipe out completely, within the lifetime of the donor. While an income stream would still be guaranteed from the insurer, there would be no assets left in which to satisfy the reserve requirements. This would require the nonprofit organization to set aside unrestricted assets for the reserve. It is also possible that even when the contract has value to it, the state may not consider it a valid investment asset for reserves. (Note: here in California a variable annuity, depending on the investment, could be considered for reserve requirements…so it is possible).

      “So, in my opinion, looking at the IGAP as a potential solution given my limited knowledge of your circumstances does not seem to be a viable fit. I’d rather direct you to a community foundation or vendor such as Comerica Legacy Foundation, where you can benefit from a potential residuum in the future without all of the regulatory and investment headaches.

      “Having said all that, I do feel the variable annuity could have a very successful outcome as a potential bond alternative as part of a CGA investment pool. But since that is not the topic of this thread and would border on self promotion, I will leave that to those that inquire directly.”

      I would just add that when exploring the services of any service/product provider, one should a) get a list of other nonprofits using the service or product, b) ask the provider if a state tax ruling has been obtained concerning whether the product qualifies as re-insurance, c) ask for a full disclosure of all related fees (i.e.: commissions, administration, mortality and expense charges, separate account wrap fee, and sub-account manager fee), and d) carefully shop and compare all your CGA options. You will also want to fully understand which options mitigate risk v. eliminate risk.

      I hope you found the wait for a response worth it. Thanks again for participating in the conversation.

  3. Good post Michael. The first organization I worked for as a Director of Development had a mailing list of 28,000. When we ran that database against public records, I found aproximately 10,000 of those were 65+, high assets, low income, etc. So I strongly and actively promoted CGAs and simple bequests in newsletters and did a few targeted direct marketing efforts. I began closing a fair amount of both in short order, including six figure CGAs and seven figure bequests. The biggest responses would come after sharing stories in our newsletter of folks who completed a CGA and why they did it…”to invest in children.” I was with a faith based organization so for the CGA’s I utilized the denominational affiliated state foundation. I used Crescendo Lite to develop annuity projections, met with donors, etc. but the CGA contracts were technically between the donor and the Foundation with my charitable organization irrevocably listed as the ultimate beneficiary.

    Another thought…Given the current state of daily market uncertainty, plus the U.S. Federal Reserve committing to keeping interest rates near 0% for two years (keeping cd and savings rates anemic), CGA’s should be rather attractive to seniors on fixed incomes, creating a truly win-win situation. As long as the Council on Gift Annuity’s current rates are valid and a nonprofit is conservative in managing investments that is.

    I’ve been privy to information from one of the very well known national U.S. charities with a significant planned giving program. They have seen a significant uptick in CGA inquiries over past year…up 55% year over year! Now may be a great time to thoughtfully promote and develop a CGA program. What does Michael Say or See right now in that regard?

    • Robert, thank you very much for sharing your insights. From the perspective of donors, I think the volatility in the stock market along with very low bond rates makes CGAs an attractive income opportunity. A donor aged 65 might get a return of 6% with a CGA while an 80 year-old donor could get a return of 8%. In today’s economy, there are not many other ways for someone to get that kind of secure return. And, of course, the individual gets to support a favorite charity as well. However, from the perspective of the nonprofit organization, CGAs present some challenges. The extreme volatility in the stock market means that some nonprofits have seen there CGA program go under water as reserves or endowments shrink. Regulators require organizations to maintain a certain reserve level to secure CGAs. Given the risks involved and the amount of government red tape, it’s understandable that some organizations will be reluctant to get involved with CGAs. Fortunately, there are options such as re-insurance or using a third-party issuer that can mitigate the risk. So, given strong donor interest, I would encourage all charities to at least explore the options. The ultimate conclusion might be to not issue CGAs, but that should be a conscious decision made after careful deliberation. And, if a charity begins to issue CGAs or more aggressively market an existing program, it may very well see terrific results as you’ve described.

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