Earlier this year we started the TOLI Challenge with
the question: What is most important when
determining the liability of a trustee’s actions? Click
here for that answer. Today,
we have a follow up true or false question.
permanent life insurance policies can be sold in the life settlement market,
True or False?
It may surprise you that the answer is false – some term policies actually can be sold. Term policies,
without cash value, are most often surrendered
back to the carriers for no value when, under the right circumstances, they can be sold
into the secondary market, providing the trust with additional cash that can be
passed down to the beneficiaries or used
to fund other policies.
The key is whether the policy
is still convertible. As you may know,
term policies can have a feature that
allows the policies to be converted to a permanent policy with the same carrier at the same underwriting
class but at the new age of the insured.
So, a term policy taken out on a 45-year-old
insured ten years ago and initially underwritten as a preferred risk can be converted
to a permanent policy at preferred rates for a 55-year-old
– without the insured going through the underwriting process.
conversion options are for a limited period, or to a certain age, so you must check
to see if the term policy conversion
option is still available. If it is, the policy may be marketable.
To see if it is, you will have to ask the carrier to provide
you with a conversion illustration showing the premium requirements for the new
permanent policy. Once obtained, you can
contact a life settlement broker who will review the policy costs and the
health records of the insured to determine whether the policy is saleable and
at what price.
Not only are convertible term policies often sold into the
secondary market, they rank just behind current assumption universal life
policies, as the most popular life settlement policies. However, most TOLI trustees are unaware of
The fiduciary duty of a TOLI
trustee includes maximizing the value of the asset in their trust – even a term
policy that appears to have no value.
Back in November, we wrote about the possible
“squashing” of “investors’ hopes for unlimited returns using life insurance.” At
that time, the government of the Canadian
province of Saskatchewan altered the regulations
for a specific universal life insurance policy that some investors had hoped would be their pot of gold.
However, the regulation change did not affect
a court case that has since settled in favor of the insurance companies involved, including Manulife.
in question were Canadian current
assumption universal life policies that the investors felt set no limit on the amount of money that could be injected
into the policies. Similar policies in the United States place restrictions on premium contributions.
According to a white paper we referred to in our earlier
report, one of the policies in
question had two cash accounts: a tax-exempt
account and a taxable account. Cash placed in
the tax-exempt account went to pay policy expenses, but an additional amount over and above that
cost could also be contributed. Each year on the
policy anniversary date, a test would be run, and any cash over a
specific amount would be moved from the tax-exempt account to the taxable
account to preserve the tax status of the policy. Both accounts guaranteed
at least a 4% return (some other policies had up to a 5% guaranteed return), and
the tax-exempt account paid an annual bonus of .85 percent on the policy’s
Investors, including private citizens, hedge funds and money managers, purchased policies hoping to take advantage of the guaranteed returns by placing millions into the policies. The outcome
could have been catastrophic for the carriers,
with a Manulife expert testifying that a $100 million deposit would cause
“an immediate reported loss to the insurer in excess of $45
million,” according to the referenced white paper.
The Saskatchewan regulation change limited investors to contributing
only an amount equal to the premiums required under the contract. Last week, a
judge of the Court of Queen’s Bench of Saskatchewan agreed with the new
regulation. According to a Wall Street Journal
article, he stated in his ruling “that although the disputed policies
didn’t set investment limits, the contracts were designed to restrict
investments for such insurance related costs as taxes and fees.” (1)
The judge did rule that the
Saskatchewan amendment was not retroactive. The investor group plans to appeal
the decision and according to the Wall Street Journal article, “the reversal of
the retroactive claim means that if the investors are successful with future
appeals of the ruling, the province can’t block their investments under the
Manulife issued a statement that the
investment scheme was a “commercially absurd” use of the policies and that they
were confident future appeals by the investors would fail.
We will report back with updates, as
Win Court Battle Over Investment Strategy, Jacquie McNish, Wall Street Journal,
March 18, 2019
Universal life policies
came into the market offering premium flexibility and transparency that was
unknown in whole life policies. However, universal life policies lacked one
thing those whole life policies had – death benefit guarantees. If you paid
your premium on a whole life policy, the policy death benefit was guaranteed to
universal life policies (current
assumption) were fixed investment products developed because interest rates
were lofty. The crediting rates assumed in sales illustrations were as high as
12%. This created attractive, low premium, high-cash value products with
assumptions that were doomed to fail – and they did.
The life insurance industry reacted, creating
a new product – guaranteed universal life, or GUL, which just like whole life,
guaranteed the death benefit. But with
GUL the policyholder loses one of the most popular features of a universal life
policy – premium flexibility. These policies have a set premium that must be
paid in full and on time, or the policy death benefit guarantee will be
shortened or lost.
One of the common problems trustees
rarely catch is when a GUL policy is purchased as a replacement, and the
required premium in the as-sold illustration includes 1035 Exchange money
coming over from the existing policy. For the policy to maintain its stated
guarantees, the 1035 Exchange amount coming over needs to equal or exceed the
expected amount. Often, during the underwriting process, the existing policy’s cash
value drops because of charges coming out of the policy, or in the case of a variable
policy, a drop in the equity markets. Our solution: when the exchange occurs,
verify with the carrier the exact amount coming over from the existing policy
and make any adjustments needed at that time. Also, with a variable policy,
place the cash value in the current policy in a money market or fixed account
while the underwriting occurs on the new policy so that a market correction
does not cause the cash value to swoon.
Once the GUL policy is in force, your administrators
will have to make sure the premium is paid in full and on time. This means that
gift notices must go out on time and if gifts are not received, following up aggressively,
making sure the grantor understands the consequences of a late gift. Note: This
should all be spelled out in the document you provided to the grantor for
signature when the policy is placed in the trust.
GUL payments are sometimes tricky. Over five years ago, we
pointed out that one carrier found that after only four years of selling the
product, 31% of the policies sold were already
off track. The reasons: 8% were because of insufficient premiums, 29%
because of skipped premiums, but the majority – 53% – were because of early
payments. That is right, 53% were off track because the premium was paid early. This particular carrier has different crediting
rates in their shadow accounts depending on funding levels and paying early resulted in a lower credited rate.
Other carriers have higher sales loads
in the early years, so paying early can
cause more of the premium to go to fees and charges with less to the policy –
again, creating an issue with the guarantees. This can be especially
troublesome in the first policy year when charges are highest. A while back, I
came across a report by a life insurance analysis firm that claimed you could
lose up to “30% of your original guarantee period” by paying the second year’s
premium in the first year. According to the report, in a little over half the
policies they tested, paying early did
not make a difference, but the others “on average lost anywhere from 10 to 20
years off the life of the guaranteed policy.” (1)
Guaranteed universal life takes the
market risk out of life insurance, but it adds additional risks that sit
squarely with the TOLI trustee. For all
GUL policies you take in you should understand all of the policy nuances – or hire
someone who does.
Premium, Sydney Presley, LifeTrends, October 29, 2018
When we first ventured into the trust-owned life insurance (TOLI) servicing business, our lead product was a policy tracking and trust administration system – what is known today as InsuranceIQ, and it was light years ahead of anything TOLI trustees had at their disposal. At the time, most trustees simply got an in-force ledger every couple of years, along with a rating update for the carrier, placed it all in the trust file and moved on. When asked about the condition of the policy, few could provide an in-depth answer. InsuranceIQ changed that. A proprietary rating system now alerted the trustee to issues with the policy and provided information on the (new) premium needed for under-performing policies to reach their goal. The InsuranceIQ annual report provided most trustees with their first systematized review of their portfolio.
Traditional ILIT support software solutions, even our own Standard InsuranceIQ Solution, as well as our competitors’ “policy review” products, do little to mitigate risk effectively. Granted, they can help minimize potential administrative miscues, and housing portfolio information in a centralized location is certainly a step up from past practices. But, you could argue that all you have done with a policy review is gather potentially liable policy information in a form that is easier to access. Annual policy reviews designed to “check the box” for audit and regulatory compliance purposes that were a viable option in the early 2000s to appease regulators do not solve policy problems or mitigate the liability associated with managing this unique asset. That is why many corporate trustees now realize handling the complexities of life insurance takes more than a policy review – it takes expertise and significant internal resources above and beyond software. Maintaining the required expertise in-house and dedicating the necessary resources internally, for an asset class that is revenue neutral at best, is nearly impossible.
Over the last few
years, there have been dramatic changes in the TOLI marketplace. Cost of
insurance increases from mainstream carriers like Transamerica, Voya, John
Hancock, Lincoln National, and others have more than doubled the carrying costs
in some policies. You may be able to show that in a policy review to your
client, but how will you deal with the policy?
have written about
new policy illustration schemes that take a 6.75% illustrated rate and turn it
into a 9% internal rate of return by adding bonuses and multipliers that are
not guaranteed. Your policy review may have projected a successful outcome, but
if it was based on faulty or misunderstood information, what good is it?
Unless you have experts on hand who can correctly analyze a
policy and deal with policy issues as they arise, you will not be able to
effectively maximize the value of the asset, which is your duty. You will only
be able to document that the problem occurred. Taking
the next step beyond policy review – remediation – is required, and it is what sets ITM
TwentyFirst apart from the policy review competition. Our Managed Solution
product provides trustees with life insurance experts who analyze and develop
succinct solutions to policy problems and document the trust file to help
mitigate your risk.
Our remediation team does not just deal with problem policies
but provides insight for any policy changes. Let’s say your client wants to
lower the death benefit because of estate tax law changes; does your staff have
a process in place that maximizes the value of the policy? If your client
wanted to surrender their policy because they believe they no longer need it,
does your staff have the capability to show that client the value of their
policy – potentially keeping that policy and trust in place? Our team does.
For many enlightened TOLI trustees, the Managed Solution
provides the perfect alternative. It allows them to raise client service levels
and to mitigate liability for a fixed price that is often less than the cost of
doing the work in-house.
Your best business decision in 2019 starts by contacting ITM TwentyFirst. Call John Barkhurst today at 319.504.1581, or email him at jbarkhurst@ITM21st.com to get started.
We have written as recently as November of last year about
the issues trust-owned life insurance
(TOLI) trustees encounter when dealing with policy illustration projections. If you are a fiduciary managing a policy, a sales or an in-force life insurance
ledger may be one of the only tools you have to predict the outcome of a policy
under your care.
However, life insurance illustrations are simply hypothetical
projections – at best, just a guide. Too often, they are a sales tool, and the
person purchasing the policy (you, if you are the trustee) often assumes they
can reasonably expect that the outcome projected for the policy will occur. This is rarely the case for many reasons, chief
among them being overly optimistic rate of return projections and non-guaranteed
interest rate bonuses and multipliers that are not readily seen in an illustration.
This has been a significant concern for us with equity
index universal life policies that we have been tasked to review and then help
manage for trustees. These policies have become popular as a ”more
conservative” alternative to variable universal life policies because though
they track an index (the S&P 500, for example), they have a limit to the
downside that “eliminates losses.” Many variable universal life (VUL)
policies assumed cash value rates of return of up to 12% annually, and when we
first began seeing these EIUL policies (often as a replacement for a VUL
policy), the crediting rates in the projected policy crediting rates shown in
sales illustrations approached 8%, which the salesperson told the grantor was a
reasonable assumption. We disagreed and have pointed out one carrier who
actually sells the product has an online “translator” that shows that in order
to obtain an 8% crediting rate for the policy, under most common policy
parameters (10% cap, 0% floor), the index tracked would have to exceed a 12%
return. The regulators also disagreed, and in September of 2015, the National
Association of Insurance Commissioners (NAIC) placed limitations on
the crediting rate that could be shown on both sales and in-force ledgers to
The limitations placed by the NAIC dampened EIUL sales
since the policies could not illustrate as well. It was not long until carriers
figured out how to game the system by adding interest
bonuses and multipliers that were barely decipherable in an illustration. The
ploy worked, and sales rebounded, but now the NAIC is going to take another
look and has created a subgroup to review the regulations, which according to
one article on the matter, “enabled some insurers to show double-digit returns
that many considered unrealistic.” (1) We applaud the second look and hope the outcome
will generate a more reasonable methodology for EIUL illustrations.
One of the most significant risks to a TOLI trustee is accepting a
policy that has little hope for success. Many EIUL policies purchased in the
last few years will fail. How many are in
NAIC To Reopen IUL
Illustrations Guideline, John Hilton, January 11, 2019, insurancenewsnet.com
Less than a year ago we reported that
AM Best published a special report
in which the rating firm issued a negative outlook
on the US life insurance and annuity market. They cited the
continuing low interest rates, a flattening
yield curve, regulations, potential for market corrections and the need for
innovation as the major reasons for the outlook. The report highlighted
one potentially harmful issue – an abrupt increase in interest rates noting that insurance carriers prefer a slow
increase to rates that “allow them to
adjust their credited rates on liabilities and their asset portfolios to
Recently the agency upgraded
their life and annuity outlook from negative
to stable for 2019, mentioning the moderately increasing interest rates as one
of the positive factors. Other positive
indicators were strong sales in the annuity segment which had been down, as
well as strong sales in indexed universal life.
According to the AM
Best report, lower effective tax rates going forward will be a boon to the overall
profitability of the carriers, as will
the general increase in carrier investment
It is this increase in carrier returns that will be most beneficial to TOLI trustees. Policy performance
issues have been centered on the downward
slope of fixed interest rates over the
last two decades which was exacerbated by
the economic crunch of 2008-09 and the Federal Reserve
System’s actions that drove federal funds rates
to near zero over the last 10 years. Most life insurance products are driven by
fixed investments and the last two decades have not been kind to these
financial vehicles. Dividends in whole
life policies swooned and crediting rates in many current assumption universal
life policies dropped to their guaranteed lows. Some carriers looking to offset
the loss in investment income raised the cost of insurance in their products,
creating carrying cost increases of 200% or more and making some policies
unaffordable for policyholders, many who could no longer purchase newer, more
This AM Best report provides those of us who
manage life insurance for a living with the hopeful prospect that policy
performance will improve going forward taking a bit of the pressure off of
managing a life insurance portfolio.
most important when determining the liability of a trustee’s actions?
Over the years, we have noticed that the knowledge of TOLI
trustees varies from trust company to trust company. After publishing the TOLI Handbook
in 2018, we thought we would “chunk it down” in 2019 with the TOLI Challenge—a
series of questions designed to test the knowledge of the typical TOLI trustee.
We will be publishing questions throughout the year and hope that you accept
the challenge and maybe learn something new throughout the year.
Our first question:
What is most important when determining the liability of a
Whether they follow the grantor’s instructions
Whether the policy performs as expected
Before we blurt out the correct answer, let’s walk through the
The first option is the outcome determines the liability, and
certainly, a negative result can draw the ire of the beneficiaries and initiate
an action against the trustee, but often, the adverse outcome is outside the
control of the trustee. If the outcome is because of direct negligence of the
trustee, there may be an opportunity for the beneficiaries to move ahead with
The second option is whether the trustee follows the grantor’s instructions.
If by grantors’ instructions we mean to follow the trust document, then this
answer has some validity. After all, a trustee needs to review the trust document
and then administer the trust according to the guidelines of that document. However,
if it means following the whims of the grantor, then certainly the answer is
no, as can be seen in Paradee v. Paradee.
The third option deals with policy performance, and if this is an
issue, then many trustees would be in trouble because in general, policies have
not performed well over the last ten years or more. In Nacchio v. David Weinstein and the
AYCO Company, we saw a fiduciary held liable for over $14M in a case that
centered around policy performance.
All the answers above could have some consideration, but we
believe the answer is the process. For the other options – each of which could
bring liability – a proper process could either alleviate the problem or negate
If a policy has a negative outcome, it is not necessarily the trustee’s
fault. The Uniform Prudent Investors Act (UPIA) speaks to this in Section 8 of the UPIA in reference to
prudent decision making as it deals with compliance, which it says is “determined
considering the facts and circumstances existing at the time of a trustee’s
decision or action and not by hindsight.” As long as the decision making at the
time was prudent, liability will be limited. How to ensure it is? Have a prudent
process that is followed and documented.
second choice, following the grantor’s
instructions, could be an issue, but not if you had a sound practice in-house
to follow the guidelines of the trust document in a prudent manner, and as part
of your administrative and decision-making process, you are not swayed by the
whims of the grantor. For some trustees, this has been an issue – after all,
the grantor pays the bills, but Section 5 of the UPIA is clear when it says a
trustee is required to “invest and manage the trust assets solely in the
interest of the beneficiaries.”
third choice, policy performance, could be problematic for those trustees who have
not closely tracked their portfolio and made their grantors aware of the
situation. In the Nacchio case, the policies brought in had rate of return
assumptions of over 10.5%, which were never attained. Again, the process
followed could alleviate the issues that could come from a policy that did not
live up to expectations. When the policy is taken in, make it your policy to
assume very conservative returns for the cash-value investment. Create a document
that shows the outcome (and additional costs) at a lower return and have it signed
by the grantor and made part of the trust file. As part of your prudent
process, review the policy annually, and if the policy is off track, provide
the grantor with a solution (typically, more premium).
So, the answer, we believe is the fourth choice: the process
followed is the most critical factor when determining the liability of a
trustee’s actions. This is not the first time we have said this, and it won’t
be the last. We firmly believe in the prudent process. It is the backbone of
our business model.
The outcome cannot be (completely) controlled, but the