CAP Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: Which underwriting factor most directly influences the premium for a charitable gift annuity?
- Current interest rates
- The annuitant's age and life expectancy (Correct answer)
- The charity's endowment size
- The type of assets donated
Correct answer: The annuitant's age and life expectancy
Gift annuity rates are primarily determined by the annuitant's age because life expectancy dictates how long payments will be made.
Question 2: A donor establishes a charitable remainder unitrust (CRUT) and names a 45-year-old beneficiary. The primary underwriting concern is:
- The investment volatility of trust assets
- The long payout period due to the beneficiary's young age (Correct answer)
- The charity's ability to receive the remainder
- Federal estate tax exposure
Correct answer: The long payout period due to the beneficiary's young age
A young beneficiary creates a very long distribution period, substantially increasing the risk that trust assets will be depleted before the charity receives any remainder.
Question 3: In the context of split-interest trusts, what does the '5% probability test' evaluate?
- The likelihood the trust will earn at least 5% annually
- Whether there is at least a 5% chance the charitable remainder will receive something (Correct answer)
- That the income payout rate does not exceed 5%
- The probability of the donor surviving 5 years
Correct answer: Whether there is at least a 5% chance the charitable remainder will receive something
The IRS 5% probability test ensures there is at least a 5% chance the charity will receive a remainder interest, preventing abusive arrangements.
Question 4: A philanthropic advisor reviews a donor's proposed pooled income fund contribution. Which risk factor is MOST unique to pooled income funds compared to CRATs?
- Interest rate risk affecting payout levels
- Credit risk of the fund manager
- The donor cannot predetermine the exact income payment amount (Correct answer)
- Liquidity risk on illiquid asset donations
Correct answer: The donor cannot predetermine the exact income payment amount
Pooled income fund payments fluctuate with the fund's actual earnings, so donors cannot guarantee a fixed payment unlike a CRAT with its fixed annuity rate.
Question 5: When underwriting a life insurance policy intended to replace a charitable bequest, the insurer will LEAST likely consider:
- The insured's current health status
- The charity's tax-exempt status (Correct answer)
- The insured's financial justification for coverage amount
- The insured's lifestyle and occupation risk factors
Correct answer: The charity's tax-exempt status
Insurers focus on the insured's insurability and the economic justification for the death benefit, not the beneficiary charity's tax status.
Question 6: A donor age 80 wishes to fund a charitable gift annuity. The advisor should warn that the primary financial risk to the charity is:
- The donor may outlive actuarial projections, reducing the charity's eventual remainder (Correct answer)
- The annuity payments may be taxed as ordinary income
- The state may revoke the charity's gift annuity license
- The donor's estate may challenge the arrangement
Correct answer: The donor may outlive actuarial projections, reducing the charity's eventual remainder
If an elderly donor lives significantly longer than expected, the charity must continue paying the annuity, potentially eroding the principal it expects to retain.
Question 7: Which risk management strategy is MOST appropriate for a small charity concerned about longevity risk in its gift annuity program?
- Increasing the annuity payout rate to attract more donors
- Reinsuring the gift annuity obligations with a commercial insurer (Correct answer)
- Accepting only annuitants over age 75
- Investing reserves entirely in equities for higher returns
Correct answer: Reinsuring the gift annuity obligations with a commercial insurer
Reinsurance transfers the longevity risk to a commercial insurer, protecting the charity if annuitants live longer than projected.
CAP Risk Assessment & Underwriting 2
Which underwriting factor most directly influences the premium for a charitable gift annuity?