Tag Archives: Charitable Gift Annuity

The Stuff Behind Charitable Gift Annuity Rates

acga_logo_150pxThe American Council on Gift Annuities announced last week that its suggested rates for Charitable Gift Annuities, or CGAs, would remain unchanged from last year. Here’s a look at the assumptions that lead to the rates.

The Council meets at least annually to review its rate recommendations and consider adjustments to its assumptions.

Clients often ask where the rates that 95% of charities rely on, come from. They come from five assumptions.

1. Your charity will realize 50% of the face value of each gift. At the death of the one or two people receiving income from a CGA (the annuitant/s), what remains from the face value of the gift is transferred to your charity. If it’s a $25,000 gift annuity, you should get $12,500. For that to happen, the other assumptions have to hold. What’s your experience been?

(The annuitants are usually the donors, but not always. Think of a donor couple arranging for an adult child to receive payments for life.)

2. Annuitants will comply with mortality assumptions. I know people who I hope long outlive their projected mortality. There are a few others who are welcome to go at any time.

ACGA uses the Annuity 2000 Mortality Tables. (Click the link to see how long the National Association of Insurance Commissioners says you’ll live.) There are two tables, for male and female. To be conservative, ACGA assumes all annuitants are female (live longer) and one year younger than their real age (so they’ll get a lower rate of payment).

Mortality is a complex subject. It’s based on large numbers and doesn’t apply to individuals, so if you don’t like what you see in the table above, there’s still considerable hope for you. But, for gift annuities to work there has to be an assumption around each annuitant’s life expectancy, and mortality tables are the best we’ve got.

3. Your charity will pay administrative fees of 1%. That’s taken as a percentage of your gift annuity reserve fund, which many states require. My clients are small- and mid-size charities. For their gift annuity programs 1% is wildly low. Five to 8% is more what I see.

What’s your experience?

4. The reserve fund will earn 4.25% annually. The reserve fund has to be invested and the Council assumes you’ll earn 4.25% each year. That’s been highly unlikely for the past 3 to 4 years because all but the largest reserve funds are conservatively invested. Deduct fees from earnings and that’s your earnings net of expenses. For a lot of charities it’s a negative number recently.

What do you see?

5. Annuitants are paid quarterly. Payments can also be monthly, semi-annual or annual. Quarterly is most common in my experience. If payments are less frequent then your reserve fund will enjoy a higher balance as money remains in longer. Most charities allow donors to choose their payment frequency.

Those are the assumptions that translate into the Council’s suggested rates for immediate payment gift annuities. I haven’t covered deferred payment annuities.

A history lesson: in the mid-90’s there were two federal antitrust cases naming ACGA as defendant and alleging price-fixing in the rates. Congress twice stepped-in with laws to protect ACGA, gift annuities and all the charities (and others) that rely on the recommended rates. Check out this short summary of the legal drama.

Talk About Charitable Gift Annuities

Courtesy of Elva Keaton on Flickr.
Courtesy of Elva Keaton on Flickr
I’m doing a training series on charitable gift annuities, or CGAs, for a client so I’ll share a piece of the outline: how to talk about gift annuities with your prospects.

If you’re not familiar with these, here’s a CGA primer from SmartMoney.com.

In many states your charity has to be approved by state authorities before you can offer CGAs as a gift option to residents of the state. This is for those that have that approval, or if your prospect resides in a state that doesn’t require approval.

The American Council on Gift Annuities has an informative site that includes a summary of regulations state-by-state. (I refer to the ACGA site often, but it’s not definitive for state regs. I always check the primary source–state law–before forming a final answer on a regulation question.)

Who do you talk to?
Prospects for CGAs are typically 65 and over, with most of the gifts coming from those who are in their mid- to late seventies. You should be actively listening to prospects all the time.

Clues that reveal you’re talking to a CGA prospect:

  • I need more income
  • I’m worried about retirement income
  • I’m supporting a sibling; parent; or adult child (CGAs can be written so non-donors receive the lifetime payments.)
  • My spouse will need income when I’m gone
  • My stock dividends are low (CGA rates are higher than nearly every stock dividend.)

What do you say?
First, explain what long-term gifts do for you. Motivate prospects by feeding off what they already love: your charitable work.

Then, give your overview of the CGA features:

  • simple agreement
  • make your gift with cash or stock (or whatever state law and your gift acceptance policy say)
  • steady, fixed payments for the lifetimes of one or two people
  • what remains is a gift that supports our work

What if they’re interested in the financial features?

  • rates vary with age; the older you are the higher your rate; would you like me to do a personalized overview for you?
  • payments are steady and fixed for life (worth repeating)
  • payments are backed by all the assets of the organization; have you seen our annual report on our site?
  • assets are managed by X, with oversight by our CFO and/or board investment committee
  • CGA program is approved by the state department of insurance (as appropriate)

What’s next?
Your prospect may want to talk to their husband or wife. Offer a personalized, written overview (assuming you have software to produce one) so they’ll have more detail and their discussion can be more informed.

This will get your charitable gift annuity conversations started. What have yours been like?