Building a Nest Egg for Charity ; Life Insurance Policies Gain Favor as a Tool for Giving and Estate Planning

By Kolesnikov-Jessop, Sonia | International Herald Tribune, July 19, 2012 | Go to article overview

Building a Nest Egg for Charity ; Life Insurance Policies Gain Favor as a Tool for Giving and Estate Planning


Kolesnikov-Jessop, Sonia, International Herald Tribune


Asians looking to donate money to charity after their passing are turning to universal life insurance policies, which offer a guaranteed payout upon death that can be easily transferred.

The growing number of wealthy Asian families looking to combine estate planning with philanthropic giving has spurred private banks to look for more ways to enable their clients to fulfill their goals.

One of the newly popular vehicles is universal life insurance, which offers liquidity and control not always found in traditional vehicles, like a charitable trust or foundation.

"More Asian clients are now using universal life insurance to give to charity when they are gone, as it allows them to give away much more substantial sums than they might have otherwise been able to," said James Aitken, managing director of Private Wealth Solutions at HSBC.

A universal life insurance policy pays out upon death of the insured and, depending upon the type of policy, it may be possible to guarantee the amount of the proceeds. Universal life policies typically carry a minimum rate of return known as a crediting rate. The insurance company, after deducting the cost of insurance, credits the policy with the balance, helping to build up the cash value while the policy remains in force.

David Hayward Evans, head of philanthropy services and values- based investing at UBS, said a universal life insurance policy offered a measure of certainty for both donor and recipient. With a guaranteed a rate of return, the donor will know exactly how much will be left to the charity. Because the payout is triggered automatically upon the death of the donor, the recipient receives the funds directly and relatively quickly.

The other side of the coin is that the donor and the beneficiary will not know precisely when those assets will become available, nor how much they will "cost" the benefactor in premiums.

A universal life policy also offers flexibility with the premium payments. Donors can make a one-time premium payment or opt to pay an annual premium, typically over a 10-year period.

Private banks can help finance the policies. Michael Troth, head of Asia for Citi Trust in Singapore, said that typically the bank would lend 70 percent of the lump-sum premium and take the policy as collateral for the loan.

This plan, he added, is particularly appealing in a low interest rate environment: "The insurance policy pays you a guaranteed minimum rate of return, and given the current level of interest rates, it may well be possible to receive a higher rate of interest on your insurance policy than you are paying on your loan."

As with all arbitrage, however, there is a risky side: "If interest rates spike, the cost of your borrowings will quickly outpace the rate of return you're getting on your policy," Mr. …

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