Lawsuits Raise Concerns About Charities’ Use of Life-Insurance Policies to Raise Money

Dueling lawsuits over a plan to raise hundreds of millions of dollars for Oklahoma State University’s athletics programs through life-insurance policies—and other lawsuits that involve similar arrangements—should give charities pause, fund-raising and legal experts say.

The disputes involve charities that take out life-insurance policies to cover a group of board members, donors, or other constituents. In some cases, the premiums are paid by the individuals; in others, the charity takes responsibility for them. After a certain period, they sell the policies to investors who provide cash in return for any remaining money in the policies when the insured people die.

The deals have many variations and have been pursued by different types of charitable organizations, including universities, churches, and social-service groups.

$10-Million Policies

In the case of Oklahoma State, the university took out life-insurance policies worth $10-million each on 27 alumni and supporters who agreed that policies in their names would ultimately benefit Cowboy Athletics, a nonprofit fund-raising arm that helps pay for the university’s sports programs.

Last month, Cowboy Athletics and the billionaire investor T. Boone Pickens, an alumnus and board member who helped set up the life-insurance deal, sued Lincoln National Life Insurance Company and several of its agents.

The lawsuit alleges that the insurers charged Cowboy Athletics inflated premiums of more than $33-million, and falsely promised that the policies would produce $100-million to $350-million for the university over 20 to 25 years. In addition to getting the premium payments back, the lawsuit seeks to recover approximately $10-million that Mr. Pickens spent to guarantee loans that paid premiums on the policies.

But Lincoln National went to court the same day as Mr. Pickens and said in a counter lawsuit that the policies were legal contracts and Cowboy Athletics had no legal right to rescind the policies or obtain a refund. The insurer has declined to comment further on the lawsuit.

Some Legitimate Uses

Life insurance has long been used by charities to raise money, and insurance and fund-raising experts say that many life-insurance deals are worthwhile. But they contend that arrangements like the one at Oklahoma State are risky for charities and that the bad economy has only made them more so.

For example, many of the deals involve selling life-insurance policies on donors to investors, but the capital for such investments, and investors’ interest in the deals, has waned in the wake of the recession.

Frank Minton, a planned-giving expert in Seattle, says donor insurance deals, despite their goal of raising money, may actually “subvert fund raising because donors who lend their lives may assume they have done their bit and not make a gift.”

Questionable Practices

Beyond Oklahoma State, other charities have faced life-insurance woes. Richard Incandela, a two-time felon, was arrested in Florida this month for marketing fraudulent life-insurance policies. He has been accused of selling policies to donors at small Christian schools in Oklahoma and Wisconsin, and then pocketing some or all of the premiums.

Mr. Incandela has not commented on the accusations sincehis arrest, according to the Journal Sentinel, in Milwaukee.

Other life-insurance deals have sparked ethical concerns. Barry Kaye, an insurance agent and a prominent donor at Florida Atlantic University, spearheaded an effort to set up a life-insurance deal at the university similar to the one at Oklahoma State. The Florida Atlantic arrangement would have taken out policies on many university alumni and then sold them to an investor.

Mr. Kaye has denied any wrongdoing in the Florida Atlantic case and other such arrangements he has been involved in and said that he has helped raise substantial funds for charity.

But experts question whether Mr. Kaye, who has since retired, and other donors or board members in the insurance business are influencing nonprofit organizations they work with to set up life-insurance arrangements that involve too much risk and too little gain for charity.

“It’s hard to get your arms around these cases: Some are illegal, some are unethical, and some just won’t work,” says Stephan R. Leimburg, a Bryn Mawr, Pa., insurance expert. Nevertheless, Mr. Leimburg and other experts are also quick to say that many donations involving life insurance are well worth pursuing.

Among the worthwhile plans are life-insurance policies for which the donor has paid all of the premiums and named the charity as a beneficiary, after deciding he or she does not need the policy. Such uses of life insurance are distinct from deals that seek to insure groups of donors with the goal of amassing large sums at a much later date, says David Wheeler Newman, a Los Angeles lawyer.

Those arrangements have become “more perilous” in a bad economy, Mr. Newman says, even as charities are increasingly anxious to find new ways to raise money. “Many nonprofits are desperate to get money,” he says, “and some organizations stretch for things they shouldn’t be stretching for.”