Death dividends or creative financing?
Chico-based brokerage encourages charities to invest in life insurance policies for long-term fundraising
Faced with ever-increasing competition for donations, organizers of the non-profit Christian Medical and Dental Associations of Bristol, Tenn., thought they’d try something different, according to a recent story in The Wall Street Journal.
The group, which lobbies against abortion, euthanasia and stem-cell research, had been approached by a brokerage firm based in Chico, Calif., with an interesting offer. For $100,000 the firm would set up an unusual but potentially lucrative fundraising mechanism. In essence, the brokerage would purchase life insurance policies for thousands of volunteers and name the charity as the beneficiary. The broker would line up investors willing to pay for the insurance plans.
Over time, as those volunteers died, the CMDA would reap the benefits. According to the WSJ story, the brokerage firm’s spreadsheet showed that, with 5,000 volunteers, the charity would reap $30 million over three decades. The outside investors would realize more than $2.5 billion from their original $208 million investment.
CMDA paid the broker $100,000 to line up the necessary parties. But, as of today, the 15,000-member association has yet to receive a penny to help in its quest to “Increase our national voice on policy and ethical issues such as euthanasia, abortion and human embryo research.”
CMDA has not implemented the program yet because Tennessee insurance regulators are raising questions about its legality.
When we tried to contact David Stevens, executive director of Tennessee’s CMDA, we were deflected to public relations representative Jennifer Pickle.
“Our CEO, David Stevens, wanted me to tell you he is not interested in talking with you,” she said. “He is not going to do an interview with you at this time. He’s asked me to direct you to the Wall Street Journal story.”
Pickle said her company “is not doing anything with that right now,” referring to the investment, but that it “hoped to move forward [with the program] sometime in the future.”
The broker is Capital Partners Funding Group, Inc. The business incorporated in Delaware, but its founder and main offices are in Chico.
The program in question, which is sometimes called a CHOLI (for charity-owned life insurance), is modeled on a long-standing practice used by corporations to cash in when key company officials, or in some cases rank-and-file employees, die. Often the employees don’t even know their employer has taken out such a policy.
“These life insurance policy things are really odd,” said Nancy Kramer of the state Insurance Commission. “They’ve been getting a lot of negative press, especially since Sept. 11.”
Kramer said many of the companies who lost employees in the World Trade Center attack were able to collect on the life insurance policies they’d taken out on their employees. Reported in the wake of that unspeakable tragedy, the practice was heavily criticized.
In some cases, Kramer said, the company can collect on a policy for a worker killed on the job. “It makes you wonder what sort of motivation employers have to provide safe work conditions,” Kramer said.
What’s more, corporations can write off the policies on their taxes. Charitable non-profits, of course, don’t pay taxes and thus can’t realize that benefit.
But CHOLIs, says Capital Partners founder Allin Karls, are a perfectly legitimate way to raise money. The Wall Street Journal story, he said, was unfair and misleading.
Capital’s founder is a patient man who speaks with trace of a Minnesota accent. Right up front he said it is nearly impossible to explain over the phone how his L.I.F.E. Heritage Program, the policy his corporation markets, works.
Unfortunately, he added, upcoming family commitments precluded him from either a face-to-face interview or even time for a photo any time in the next week.
Still, he wanted to talk about his business, which he said cost some $7 million in legal and accounting fees when he incorporated it on July 16, 1996. He said he currently has 18 clients, and though none have seen a return on their initial investment, he expects to see his earliest programs come to some fruition within a few months.
“We are just working now to do the first set of closings, and that will be done sometime this summer,” Karls said. “Now that will be a story.”
CPFG lists its offices at an address on Garden Brook Drive, north of Chico off Highway 99. The address is actually Karls’ large, gated home. CPFG also has offices in the Philadelphia Square office complex on The Esplanade south of Eaton Road, in the same building that houses Rep. Wally Herger’s local office.
According to the Delaware Division of Corporations—whose Web site boasts “Businesses choose Delaware not for one single reason, but because we provide a complete package of incorporations services including modern and flexible corporate laws"—CPFG has three officers and 75,000 in common stock worth 10 cents a share.
According to Experian Business Reports, located on a Lexis-Nexus search, CPFG has annual sales of $750,000, is privately held and has three officers—Debbie Carver, owner, Bruce Johnson, vice president, and Karls, chairman.
The Better Business Bureau of Northeast California reports it has requested basic information from the company but “has not received a response to this request.”
Karls, who is an active member of the Seventh-day Adventist Church in Paradise, said he moved to Chico from Minneapolis seven years ago to be closer to his grandchildren. The service his company offers, he said, is far from simple.
“It is extremely technical,” he explained, “and excruciatingly precise in how we have to do it, but the essence of it is that we work with large charities. It doesn’t really work for smaller charities because you need a lot of people.”
He said the charities must have at least 5,000 people who are donors or supporters.
“What we do is buy insurance on those lives as a funding vehicle,” he said. “We use life insurance not really for the death benefits so much, because you are never going to make money doing that with the insurance companies. And that is what everybody loses sight of.”
That misunderstanding, he said, tripped up the reporters who wrote the story for the Wall Street Journal.
“Nobody wants to spend the time to figure out what it does do because it does take a lot of time,” he said. “It’s kind of hard. We’ve worked through a system that makes it possible for the charity to collect money over a long period of time. It’s a very tiny trickle of money compared to all the funds that go through it. Margins are small.
“There is no magic. There is no smoke and mirrors, so you have to have enormous sums of money that flow through because the insurance company is going to make a little bit of money, we’re going to make a little bit of money, the charity is going to make a little bit of money, but there still has to be enough there for the people who loan the money to pay those premiums. What they really do is loan money, but they are still outside investors.”
The outside investors, he said, won’t get anything back on their investment for about 30 years, at which point they can start to see a return of about 8 or 9 percent.
“It’s moderate, though right at the moment it’s a pretty good return,” Karls said. “But if you look at a 30- or 40-year period, it’s certainly not an egregious rate of return.”
Investors, he said, are not actually investing in the charity; they are simply lending the money to pay for insurance premiums. But the investors have to believe “the charity is a worthwhile cause,” he said.
“There are a lot of people who utilize life insurance for charitable purposes,” Karls said. “That’s the way I started. I was on the board of some charities, and they encourage people to buy life insurance and make the charity a beneficiary. That’s been done for at least 70 or 80 years, probably longer than that. The only difference with ours is that the charity doesn’t pay the premiums, nor does the person who is insured pay the premiums. We get outside third parties to do that.”
Karls said that ever since the Wall Street Journal story came out, his business has been “deluged with calls” about his services.
“I have no idea why they would be calling,” Karls said. “The article was written very negatively.”
He defends the business and says critics who charge he is promoting investments in death simply don’t understand the process.
“They make it sound as though people don’t have to die if they don’t let a charity benefit from it,” he said. “They are just trying to state it in the most negative way.”
In the meantime, the state Insurance Commission says it will remain vigilant in its watch on life insurance fundraising.
“The [state insurance] department is always concerned with products that aren’t quite the mainstream,” Kramer said. “And that’s especially true with life insurance where the purchaser is not directly connected to the insured.
“It raises a few eyebrows. I can’t tell you if we are or are not looking into this, but suffice to say the department has an ongoing interest in products that we are concerned about when it comes to consumer protection."