I am however, going to respectively disagree and advance some additional information to support my line of thinking.

There are differences of opinion, to be sure, about re-insuring using a commercial annuity. In my experience, it boils down to whether or not the church wants immediate access to some of the donation. The suggestion of investing the difference between the donation and the cost of reinsuring is certainly an option if a need for current funds does not exist. However, to invest as an added assurance against the insurance company defaulting is, in my view, overly conservative. I have been in the life insurance business for 40 years and know of no case where a policyholder has been stiffed by a default.

To assure that the donor would receive the standard charitable income tax deduction, rather than the modified reinsurance charitable income tax deduction which would be the case if reinsurance is required, it is my understanding the church/charity should have a discretionary option, not mandatory, to reinsure.

The situations where I have used a commercial annuity to fund a CGA agreement were with small organizations that did not have a formal gift annuity program with an invested gift annuity reserve fund. So we weren’t “reinsuring” anything; we were simply funding the organization’s obligation in a manner that gave the donor greater peace of mind knowing their payments were coming from a financial institution with billions of dollars as opposed to the church or charity that barely has two nickels to rub together.

For those situations where the charity mandates reinsurance, I’ll toss in two other factors.

One of the elements in the calculation of the charitable income tax deduction allowed in a gift annuity transaction is the Applicable Federal Rate (AFR), an interest rate set monthly by the IRS. Due to the decline in interest rates, the AFR has been dropping. In February 2000 it was 8.0%. The last few years, it’s been in the 5-6% range. In February, 2009, it hit a record low: 2.0%. For gift annuities, the lower the AFR, the lower the charitable income tax deduction.

First, declining AFRs lessen the spread between the standard and modified deduction. For example, the American Council on Gift Annuities recommended payout percentage for a 75 year old is 6.3%. Using the March, 2009 AFR of 2.4% results in a deduction of $42,217 on a $100,000 donation. The cost to buy a life only, no refund annuity on a 75 year old female that will pay $6,300 a year is $64,116, so the deduction would be $35,884. Not that big a difference. When the AFR was 5.0%, the standard deduction would have been $51,503.

Second, I did not bring up the fact that immediate annuities today can be medically underwritten. If the donor has health problems, the cost of the annuity is lower. I had a case where the medically-underwritten annuity was 40% less premium. Applying that savings to my 75 year old woman example would lower the cost of acquiring the annuity to $38,470, thus increasing the deduction to $61,530. This is more than the $42,217 standard deduction.

Nevertheless, Tom’s points are well taken. In any given situation, the final decision must fall on the church/charity board and their legal counsel.

Also, be aware that if reinsurance is required by church/charity policy (for example because the contract is too large, or one family is responsible for a disproportionate share of the gift annuity program, or is quite young) then that changes the charitable deduction calculation as well as the composition of the annuity payments over the annuitant’s life expectancy.