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Tuesday, April 20, 2010

The Life Insurance Tuition Plan

Charles Kushner has published an Op-Ed piece title "Op-Ed: Funding Jewish education—a self-sustaining solution." He does not present this plan as a "perfect solution" but rather a conversation starter.

The plan presented has the following two tranches:

Tranche I: Upon enrollment of its first child to enter yeshiva, each family agrees to allow the school to buy a $25,000 life insurance policy on each parent. There is only ONE policy per parent at the school, regardless of how many children attend the school. The premiums are to be paid over a period of 10 years and remain in effect until the insured reaches 100 years of age. Again, the premiums are paid at no cost to the parents.

Tranche II: Ten benefactors to the school will each select an older person to honor by buying a life insurance policy in his or her name. The death benefit will be $5 million, again with premiums to be paid over a period of 10 years and guaranteed until the insured reaches 100 years of age.

I don't want to be a complete pessimist, but this looks like an endowment fund by another name. The winner, of course, being the insurance carrier(s). The commitment is huge. I am not an insurance expert, but my understanding of whole life insurance is that when a payment is missed, the entire policy is cancelled leaving only the cash value. To put out $250,000 annually to pay for an "endowment" is a large commitment. I believe that trying to fund such a plan, if successful, would uproot other fundraising, possibly causing tuition increases until the endowment is fully functioning. Personally, I believe that further tuition increases will threaten enrollments.

Personally, I believe that the problem for many families, especially younger families, is the current price of tuition, i.e. the here and NOW. The presented plan is a long term plan that doesn't address the fact that increasing numbers of families can't afford full tuition for each child, much less try to fund a massive endowment for which there will be no benefit until at least 10 years down the road. From what I understand, the 5% Estate Plan has not yet benefited the schools, and with that plan there is no massive cost. Meanwhile, tuition continue to rise every year.

I'm interested in what my readers think, both positive and negative. I'm not opposed to long term planning by any means, but the underlying assumption seems to be that the schools will just continue to hold on until a big cash infusion kicks in some 10-20 years down the road. And to put it succinctly, I just don't share the same underlying assumption.

21 comments:

tesyaa said...

With traditional whole life, if a premium is missed and not paid within a 30 day grace period, the policy lapses - though it can be reinstated. Flexible premium universal life works somewhat differently, but missing premiums can still adversely affect the protection element of the policy. There are also multiple types of universal life; some policies focus on death benefit protection, others focus on cash accumulation.

This is just a technical point that has nothing to do with the merits or flaws of the article.

Zach Kessin said...

Also whole life is a terable investment, Much better to put money in mutual funds. Putting $50/child / month into a stock market mutual fund would make much more sense. Assuming the school can budget for the long term, which seems something that they are rather bad at.

G*3 said...

Wouldn’t the schools lose money this way?

For the insurance companies to stay in business, they have to be bringing in more money in premiums than they pay out. People who take out life insurance are gambling that they’ll die before the amount they pay in premiums exceeds the amount of their policy. The insurance companies are gambling that their client will pay more in premiums than the policy is worth. The insurance company has to be winning the bet most of the time, or they would go bankrupt.

Or is it a ponzi scheme, with new subscribers providing the money to pay for payouts?

Either way, it seems like a very bad way to make money for the schools.

Orthonomics said...

I wouldn't use the term "gambling" re: the insurance companies. But, yes, they have to make money and the actuaries ensure this to be the case. I can just see the older individuals outliving the policy if one can even be purchased.

Thanks teysaa.

Lion of Zion said...

a) long-term planning is important, but how does this help me next year? will my tuition rise another 35%? what about the following year? and the year after that?

b) "Obviously it is not a trivial matter to recruit a donor who is . . . and able to commit . . ."

note the past-tense usage in the author bio blurb at the bototm of the article.

Anonymous said...

Lion,

Charlie is now running things through his son Jared. Jared is now the public face of the business.

Anonymous said...

Unless they are assuming that insurance companies give away money for "free", this cannot work. So why bother using insurance companies (that need to skim off expenses and profit anyway) for an endowment plan? If you want an endowment, build it up the usual way - by saving money, more money, and more money.

Mark

Avi said...

Whoa, hold on. Even assuming that the life insurance part makes sense, where are we coming up with the money to fund this broadly? This plan requires finding someone who can donate 2.5 million dollars over a ten year period, plus another four donors willing to donate $300,000 each over a ten year period. You may - may - be able to find enough donors to fund a few schools. Beyond that, good luck. Keep in mind that there are hundreds of day schools, and most of them are trying to raise ~$1 million annually to cover today's scholarships. So you need to find donors willing to donate $2.5m and $300K each on top of their existing commitments, and you need to find literally hundreds of them. Where are all these incredibly generous incredibly rich people hiding? (Hint: they don't exist.)

Lion of Zion said...

ANON:

"Charlie is now running things through his son Jared. Jared is now the public face of the business."

are you sure that includes kushner academy?

Anonymous said...

Charlie never ran JKHA/RKYHS. He was just the money man behind the scenes. I believe his involvement (aside from the new building) was writing a check and making sure it was spent properly. JKHA/RKYHS actually has a team of professionals running the back office (I'm talking about business people and accountants, not the many principles and other administrators). From what I heard, after Charlie's felonies he was forced to drop out of aspects of the business (for example, he owned NorCrowne banks and his felonies forced him to sell under ethics laws). Charlie's still involved in philanthropy from what I understand, just not as publicly (organizations are leery of him). Jared took his place as the public face of Kushner Companies.

From a YU posting:
Real Estate Club with Jared Kushner
Mon Apr 26 2010 07:30 PM to 09:00 PM
Furst Hall F535 (Faculty Lounge)

The keynote speaker is Jared Kushner. Mr. Kushner is a Principle Owner of Kushner Companies, as well as the Publisher of the New York Observer. He has been involved in the commercial real estate industry for the past eleven years. Mr. Kushner is a young business entrepreneur who is a real role model for young Jewish aspiring business professionals.

https://rail.adm.yu.edu:8443/wv3/wv3_servlet/urd/run/wv_event.Detail?id=1810596

Anonymous said...

From an investment persepctive and an insurance perspective, this does not work. If a school can really find donors willing to fund this, then the school would be better of just funding a traditional endowment and investing it conservatively.

The only advantage of this plan is that there is no money to be used by the schools until the death benefits are collected. It is forced savings - an endowment might be drawn down to quickly or improperly managed. It is easy to wind up with a bloated budget where more money is available.

gavra@work said...

A much better idea would be to hit up his Machatunim.

(AKA Mr. Trump)

Besides, his idea (seemingly) will provide a nest egg to lower tuition in 2065! I think it may be too late at that point.

Lion of Zion said...

ANON:

"He was just the money man behind the scenes."

i understand that. but is still the case?

Mike S. said...

The reason this might be worth paying the insurance company fee is that this way it removes the temptation for the administrators to use the money to fund current programs instead of leaving the principal in the endowment fund. yes, whole life is a dumb way to invest if you have the discipline to save anyway. But it is a method of forced savings for those who lack discipline. I am no financial planner, but whole life can be a good vehicle for those who would otherwise squander the money rather than invest it. For those with discipline, a term life policy for insurance plus a tax advantaged savings plan will almost always be better, but the forced savings of whole life is good for some people.

Perhaps a way to achieve that without paying the insurance co profit is to have the donors set up a trust fund for the benefit of the school with trustees independent of the school and answerable to the donors intent to preserve capital for an endowment fund.

And it is correct that this will help more in 10 years than now. But perhaps better late than never.

JS said...

Lion,

Not sure. I have heard that one of the reasons that JKHA is having problems is that Charlie has either not given as much as he used to or had reneged on certain promises/understandings. I was told this was related to the family troubles that occurred. No idea if it's true, just what I heard.

That being said, clearly the numbers he mentions in his article are from JKHA and it wouldn't surprise me in the least if JKHA rolls out this plan in the near future.

JS said...

Question for those who are more savvy in these matters:

Does this plan remotely make any sense? I don't understand how this works at all. It sounds like a "get rick quick" scheme. I can't imagine the insurance companies are in the business of losing money, so how can you be guaranteed to make money on a plan like this?

To me, it sounds like "We pay $50 and sometime in the future they give us $200! Easy money!"

What am I not getting?

Anonymous said...

JS: This is not a get rich quick scheme, it's a get rich very slowly scheme. There is money to be made by the schools . . . . eventually. The issues are (i) who is going to come up with the money for the premiums; and (ii) would that money be better invested in an endowment fund that can't be touched for 30 or 40 years and then only the interest/earnings is spent.

Lion of Zion said...

JS:

yes, i heard something similar, but the way i heard it sounded a little worse.

btw, i hope you maintain the positive attitude you expressed recently on honestly frum.

Anonymous said...

Bad idea. This idea is wrong on so many levels.

JS said...

Lion,

My current thinking is a bit more nuanced than my comment on HonestlyFrum may indicate. I'm still not sure what I will do with my future children in terms of traditional yeshiva education. I think the system is hurting a lot of hard-working parents and isn't sustainable long-term. However, I'm not exactly sure that there is a crisis given the fact that I hear some yeshivas, despite their exorbitant tuitions, have a waiting list. I also think if there truly was a crisis would more readily take action than just griping about it on a blog. At the very least, they'd consider JFS. My personal issue with tuition is that I'm not sure it's a good value for the cost. I don't think students in MO yeshivas learn all that much of the things I care about and, given our income, we'd be forced to pay in full.

In terms of the comment I made, I am incredibly upset when I see people calling their neighbors leeches or complaining about how hard they work and everyone else is a lazy, good for nothing bum. To me, this is the aspect of the current model of yeshiva education that needs to be focused on the most. It engenders tremendous sinat chinam of people that are not only fellow Jews, and not only members of our community, but our own neighbors! When we get to the point that people say with a straight face that scholarship families shouldn't put meat in their cholent, we have a real problem. The current model creates tiers of the "full payers" and "scholarship families." I think the system needs to be reformed if for no other reason than eliminating this horrible hatred.

I understand the sentiment, and I don't want to feel like I'm getting ripped off either or working my butt off as others take it easy and pay less, but if I made the decision to send my kids to yeshiva, I'd do it happily. All these people are going to give themselves ulcers and are probably seriously hurting their shalom bayit and undoing for their kids the very things the yeshivas are supposed to be teaching.

If it's really that bad and bothers you that much then pull the kids out and make alternative arrangements.

Avi said...

Look, this plan sounds great. The insurance company will earn every penny of its commission because it makes the money untouchable and forces the institution to plan for the future. Some sort of trust with equivalent protections would be good, too. I don't believe that you can find donors who are willing to put up this kind of money in addition to their current commitments to the schools, but I'd be happy to be proven wrong on that count.

There is the very real concern, however, that people will confuse long term planning with the need for short and medium term solutions to the fundamental problem: how do you provide universal private school education to a growing population over the next 20 years before the policies are fully vested and come due?

The problem is not that scholarship parents are lazy or even that the scholarship burden is the key reason tuition is so high (at least at my school, it's not). The problem is simple:
Over the past twenty years, tuition has risen much faster than inflation and much, much faster than wage growth;
Families are expected to have multiple children;
Everyone is expected to educate their children using this and only this system;
There are structural forces in place that both prevent other systems from being developed and strongly discourage existing schools from cutting services, benefits, or salaries.

The symptoms of this system include lower birth rates (to try to manage costs), careerism/stress/debt/shalom bayit issues (to try to raise income), long term financial instability (as retirement savings are spent on tuition instead), and sinat chinam/isolated cases of abuse.

However, even if you don't want to address the symptoms -- after all, despite these problems, there are waiting lists at many of the schools -- a bit of simple math shows that continued tuition inflation will push more parents into the scholarship bucket, which will then raise tuition prices higher creating systemic collapse after a few rounds of desperate fundraising.

But, by all means, let's work on a plan that finds more rich people who don't exist to fund the system twenty years down the road.