Mythbusters – Three Common Areas of Confusion to Portfolio Endowment Risk

May 24, 2022

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We recently came across this article from ThinkAdvisor.com and wanted to share the following thoughts in the hope that it will get you thinking about your organization’s endowment more holistically. The article, titled “No Portfolio Is an Island, Especially an Endowment,” goes over a few considerations that organizations should take when allocating their endowment.

As life insurance experts, Legacy Giving has found that many have developed unfavorable notions specifically about gifts of Life Insurance. While it’s no doubt important to be aware of risks when investing an endowment, there are misguided perspectives we’d like to address. Here are three common trends we see when examining an organization's proclivity for accepting life insurance donations:

1. Avoidance

Some organizations have simply avoided gifts of life insurance based on previous bad experiences, the complexity of the asset, the illiquidity of the gift, or simply the lack of technical knowledge required to manage the asset effectively. They are uncomfortable with the “donation risk.” However, this should not be the sole reason an organization decides to avoid gifts of life insurance.

As the article states, “the optimal endowment allocation differs significantly across charities given the varying risks associated with donation levels. Certain charities, such as churches, have historically had relatively ‘safe’ (or constant) donation levels, while other charities, such as the arts, have exhibited significantly higher levels of volatility.” In essence, organizations should be aware of the risks of their assets and consciously reflect on their desire to invest in riskier assets, which tend to lead to better returns and are better held over the long term.

2. No review process

Others have accepted gifts of life insurance but have not regularly reviewed these portfolios with a professional to confirm whether the policies are performing as originally planned. These organizations are unaware of expected returns, which is a crucial component of deciding how to allocate endowments. The article states, “Virtually all investment managers expect returns in the near future to be well below historical long-term averages, largely due to today’s low bond yield environment.” This may broadly cause many endowment investors to allocate more to riskier asset classes but there are additional factors to consider. Ultimately, an organization should work with a professional to fully understand all of the facts and evidence in order to try and earn a higher return.

3. Minimizing instead of maximizing

Additionally, when organizations receive gifts, they tend to prefer cash rather than other assets, such as life insurance. Say someone wants to give $1M. Rather than simply take the cash, thus minimizing the impact, we would rather maximize the gift’s impact by putting that $1M (or even a portion) into a life insurance policy resulting in a death benefit of $6M. Organizations need to understand that they can use leverage (such as purchasing life insurance) as a tool to maximize the impact of gifts.

We believe this is so because there is an advice gap.

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With the right advisor, gifts of life insurance can be an efficient vehicle for an organization and their donors to further the philanthropic mission. This type of gift provides not only leverage for donors to give larger amounts but also an opportunity to diversify the endowment.

Legacy Giving will help you understand and overcome the risks associated with gifts of life insurance so that you can use this powerful tool to maximize your impact.

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