How Does Annuity Reinsurance Work?

Some charitable organization in order to minimize the risks pertaining with offering and administering charitable gift annuities, decide to purchase commercial annuity policies as a way of supporting their gift annuity payment obligations. These charitable organizations may decide to take this approach with all or a portion of their gift annuity obligations, depending on the size of the gift annuity, age of donors, the nature of their mission, and other factors etc.

Generally referred to as gift annuity reinsurance, annuity reinsurance is a process in which a nonprofit organization purchases a commercial annuity that makes payment equal to the amount owed to the gift annuitant. A charity is bound to make the gift annuity payments for the life of the donor, irrespective of the charity's ownership over the commercial annuity policy. Annuity reinsurance allows the charity to move their prime investment and durability risk to the life insurance company issuing the new annuity. If the gift proceeds are gone, the charity must reach into other resources to continue the lifetime payments. By utilizing annuity reinsurance, however, these risks can be completely eliminated.

There are some people who have a negative view of gift annuity reinsurance. Some annuitants have the point of view that all of their funds which they transfer to create their gift annuity will at a unspecified future times completely go to the charity. Hence, some donors may see reinsurance as a “shortcut” on the part of the nonprofit—simply a way for the charity to get a small amount of their money now, instead of what the donor perceives will be a much larger gift at their death. Their falls prediction about annuity rates that an average of about 50% of the amount of the gift will remain for charitable use under standard rate setting assumptions. This concept should be thoroughly communicated to the donor to avoid any future conflict.