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Charitable Gift Annuities

An annuity is the exchange of a lump sum (by an individual) for the promise of future payments (from an insurance company), either for a specified term (a term annuity) or for life (a life annuity). Some charities may issue annuities as a way of generating revenue. The donor gives them a lump sum, in return for a promise of future payments, usually for life.

In this scenario, the charity is expecting that the donor will die (not out of malice, of course) before the annuity payments exhaust the capital provided by the donor, as they get to keep the excess capital. Depending on the investment performance and the longevity of the annuitants, the charity can expect to receive, on average, about 50% of the original contribution. In a self-insured gift annuity, the charity must give its personal guarantee that those future payments will be made, even if the capital is exhausted.

Some charities have decided to team up with the insurance industry by offering a reinsured gift annuity in order to reduce the risk associated with making payments to the donor. In this case, the charity uses the donor's contribution to purchase an annuity from a licensed insurance company, with the donor named as the annuitant. The charity usually retains about 25% of the original contribution, and uses the rest to purchase the annuity. The insurance company usually makes the annuity payments to the charity, which then passes them on to the annuitant. If the annuity is issued with a guarantee period and the annuitant dies prior to the expiry of this period, the residual payments belong to the charity.

DISCLAIMER

Mutual funds, approved exempt market products and/or exchange traded funds are offered through Investia Financial Services Inc. The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed have not been approved by and are not those of Investia Financial Services Inc. This website is not deemed to be used as a solicitation in a jurisdiction where this Investia representative is not registered.

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