The TOLI Handbook – Chapter 15: Understanding Life Expectancy Reports

In our last blog, we wrote about remediation and the challenges that TOLI trustees have when managing a policy.  Remediation is not just developing the best options for an under performing policy, increasingly it means maximizing the value of a policy that a grantor believes is no longer needed, or one whose expected funding has stopped. These decisions must be well-thought-out and every data point that can be gathered should be utilized in a process that prudently steers the choices made. Often the decisions made are not black and white, they are grey and while the outcome may not be controlled, the process can.

One tool that TOLI trustees need to become aware of is a life expectancy (LE) report.  It grew out of the life settlement market where investors needed to gauge the expected lifespan of an insured and the premium costs until a benefit will be paid to calculate a fair purchase price for a policy that would enable them to make a profit on the investment.

It also provides a great tool for TOLI trustees attempting to make decisions about the management of a policy. The underwriters at ITM TwentyFirst determine the life expectancy calculation based on age, gender, lifestyle, smoking status, family history and medical condition (underwriting factors) to create the LE report. The life expectancy report typically includes the life expectancy estimate and can include the probability of mortality each year based on the insured’s specific underwriting factors.  The best way to show the value of an LE report is through an example.

A trustee of a portfolio of three current assumption universal life (CAUL) policies totaling $10 million in death benefit has been informed by the grantor, a male, age 85, that no more gifting would occur to the trust. The trustee contacted the beneficiaries who informed the trustee they too were not interested in providing additional funding. The trustee was concerned about the possibility of policy lapses but wished to uphold his responsibility to maximize the benefit of the trust to the beneficiaries.

In force illustrations were obtained on all three policies assuming no further premium was going to be paid into the policies. In addition, a life expectancy report was obtained on the insured/grantor and the percentage chance the insured would be alive was plotted.  The information was summarized in the spreadsheet below.

ChartforBlog-8-15-2018

As seen in the spreadsheet, it was projected no premium would have to be paid on any of the policies until the 8th year when Policy #2, the $2 million policy would have to be funded. All the policies would be nominally funded, allowing policy cash value to run to near zero before funding the policies with a minimal amount to keep the policies in force. The last column shows an approximation of the percentage chance the insured would still be alive. The LE report obtained showed that the insured was expected to have passed away by the end of the 9th year. While the LE report is not precise, it can provide guidance, and in this situation, it gave the trustee comfort that, at least for now, nothing should be done to any of the policies in the trust.

Using an LE report adds a data point to a prudent process. The key to mitigating liability is in the process, not the outcome.  A great example of that is shown on page 127 of the TOLI Handbook, a 155-page guide for TOLI trustees and anyone dealing with life insurance.

To download your FREE PDF copy of the TOLI Handbook, go to www.TOLIHandbook.com.

The TOLI Handbook – Chapter 16: Remediation, the Weak Link for Trustees

A TOLI trustee we work with received a request from a grantor tired of gifting to pay premium on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage.  The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured.

While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit).

Trustee choices in this case:

  1. Guaranteed $3.9 million of coverage with increasing cash value.
  2. Non-guaranteed $3 million of coverage with decreasing cash value.

 

While it seems easy to see the prudent decision is number 1, it was not easy to see at the time.  Why?  Because the trustee did not have all the information or the requisite skill to gather and analyze all the information.  In the decade we have been reviewing TOLI policies – including replacement options – this lack of knowledge and skill has been the weak link for trustees managing ILITs.

And this is a growing problem.  We cite 6 case studies in the TOLI Handbook, each with its challenges, each representing potential liability to the TOLI trustee if handled incorrectly.  And we could have added more real-life situations we have encountered.

If you are a TOLI trustee what do you do when:

  • You take on a portfolio of whole life policies with growing loans?
  • A grantor tells you to surrender their policy or allow it to lapse?
  • Grantors say they want to replace their variable universal life policy with a “more conservative” equity index universal life policy?

 

We guide you through these situations in the TOLI Handbook, a free 155-page PDF we believe represents the best single source of information available for managing TOLI trusts and life insurance.

With the changes in the federal estate tax exemption, you will be receiving more of these types of requests.  They will mean much more work, and more important, much more liability for you.

For a FREE copy, please go to www.TOLIHandbook.com.

John Hancock Performance UL COI Increases Have Little Clear Pattern

In May of this year, we reported that the first letters informing policyholders of the COI increase in John Hancock Performance UL products arrived.  In that post, we noted we would report back when we had reviewed in force illustrations to determine the amount or pattern of the cost increases.  Our NYC office headed up by Frank Tomasello did just that.  Frank, along with Pat Hall and Mike Irey, reviewed 140 of the policies we manage for institutional investors and found the COI increase was spread over the policy portfolios with no clear-cut pattern based on issue age or other factors, though they did note some trends.

Most of the COI increases we have seen in the last few years have no clear pattern.  Transamerica, a carrier who has announced a number of increases has seemingly had a random distribution of increase amounts – some COI increases in the single digits and some, like the policy we reported on in February of 2016, with increases of 99% which caused carrying costs to more than double.  In April of this year, we reported that the carrier was instituting increases that would compound over three years, effectively causing the COI increase to reach 168% after three years.

JHCOI_Chart

Of the policies we reviewed, the range of increases went from a low of 0% on one policy to a high of 90% on a policy issued in May of 2007 on a female, issue age 75. As seen in the chart to the right, about 60% of the increases in our portfolio were in the 11-50% range.

JHCOI_ByAgeWith this new John Hancock increase, there was no clear delineation of issue age affecting the percentage increase.  If you remember, we reported back in November of 2015 that AXA, when it increased the COI on its Athena II policies for all insureds with issue age 70 and above, had a two-tiered and consistent increase amount.   We found those policies issued on insureds in their 70s appeared to show an approximate 29% increase in COI rates, while policies issued to insureds in their 80s were much higher, reaching 72%.

With the new John Hancock increase, the highest percentage increases were scattered among the age groups as seen in the chart to the right.  The only general pattern that can be noticed is that the issue ages with the highest COI increases are typically followed by issue ages with the smallest increases – followed by a gradual increase upward until the increase drops off again.

When we reviewed the COI increase based on the sex of the insured, we found that for our population, the increase for females skewed higher than for males.  Approximately 64% of the policies on males fell in the 11-50% increase range, for females the approximate same percentage fell in a higher range, 31-70%.  Not surprisingly, the average increase for females was greater than that of males.  The COI increase on females averaged 47.52%, males averaged 35.75%

JHCOI_BySex

The John Hancock Performance UL policy had several different “series” that are noted on the bottom left of the policy contract.  In the portfolio of 140 policies we studied, we had two 01PERUL series and two 09PERUL series policies.  Those four policies were statistically insignificant, but we did review 103 of the 06PERUL series policies and 33 of the 03PERUL series policies.

The issue dates for the 03PERUL series ranged from 9/1/2004 to 12/27/2006, the 06PERUL issue dates ran from 9/7/2006 to 7/24/2009.

The clear majority, approximately 85%, of the 03PERUL policies fell in the 11-50% COI increase range, with only 3 higher than 50%.  In the 06PERUL portfolio, 76% of the policies were spread evenly across three ranges from 11-70% and 42% had COI increases of 51% or more, resulting in a higher average increase in COI rates.   The average increase in the 03 series was 29.03%, the increase in the 06 series was 44.80%.

JHCOI_0306

It must be pointed out that the portfolio that ITM TwentyFirst manages – though a large portfolio for one company to be managing, is still a relatively small percentage of the policies affected.  We cannot confirm if the statistics we have found will hold true for the entire block of policies affected, we can provide guidance only on those we can analyze.

If there are any questions or comments about this study, please contact Frank Tomasello at ftomasello@itm21st.com.

 

 

 

 

TOLI Trustee Work Load and Liability Climbing as Use of ILITs Diminish

As the federal estate tax laws changed in the last year, the use of new irrevocable life insurance trusts (ILITs) diminished, but the work required to administer existing ILITs went up along with the potential liability attached to the asset class.  There are several reasons for this.

  • As a country, we are aging and the population of the average TOLI portfolio is aging too. For example, 25% of the insureds in policies we manage for TOLI trustees are above age 80, 6% are above age 90.  These demographic realities create decision-making dilemmas with policies, especially those that might be underfunded. Life insurance costs rise with age and problems also increase with age.  Longevity combined with poor policy performance makes policy management decisions more complex and the wrong decision can render a policy funded for a lifetime worthless or near worthless.  For example, there are 72,000 Americans over the age of 100 (1) when most older policies mature.  Unfortunately, the outcome at maturity is often not what you (and your clients) may expect. Many older policies mature for the cash value only, creating two issues.  If the policy contract matures with significant cash value, the proceeds could be subject to taxation. Or worse – the policy matures with minimal cash value leaving the trust with little value. There is an adage with life insurance, “I want to die with a dollar of cash value in my policy.”  Unfortunately, for some who live to maturity, a dollar is about all their beneficiaries get. Try explaining that to a beneficiary that has forgone thousands of dollars over the years by waiving their Crummey rights.
  • Products have not lived up to projections over the years and the problem is growing worse. The use of whole life, with its guarantees, has dropped while the use of universal life (UL) chassis products has increased.  Some UL policies have death benefit guarantees, but most are cash value dependent policies driven by policy performance, which has lagged.  And in the last few years, many carriers have raised the cost of insurance (COI) on policies, exacerbating the performance problem.  Policies with well-known carriers like Transamerica, Lincoln National, AXA, Banner, Genworth and John Hancock, and others, have had carrying costs raised by 200 percent and more, quickly dissipating policy cash value and placing trustees in a precarious situation as policies deteriorate.
  • Even those UL policies with guarantees can have issues. According to an industry expert, (2), a major guaranteed UL carrier performed an audit of policies issued in the 4 years since it started selling the product and found that, in that short timeframe, 31% of the policies already had compromised death benefit guarantees with the major culprit being early payments. Yes, paying early actually damaged policy guarantees putting trustees at risk.
  • The greatest increase in liability and workload for TOLI trustees will accelerate in the coming years as grantors decide they no longer need their policy because of changes in the estate tax law or wish to alter the asset in the trust. The process behind analyzing options besides simply surrendering or lapsing a policy is beyond the capabilities of many trustees and we have come across trustees who have surrendered multi-million-dollar assets with no analysis – a recipe for legal disaster.
  • Policy replacements are flourishing and the number of bad replacements coming into ITM TwentyFirst has increased in the last year. One bad replacement (see Case Study #6, page 146 in the TOLI Handbook) would have robbed the TOLI trust of $900,000 leaving the trustee liable if we had not intervened. Another bad replacement caused a prospect of ours (now a client) to write a 5-figure check to make the client whole because the new policy was inferior to the one it replaced.

It’s a dangerous time out there for TOLI trustees.  And it will not be improving but growing worse.  In the coming weeks, we will be providing some guidance to TOLI trustees.  In the meantime, for guidance now, you can download the free TOLI Handbook, a guide for trustees, regulators and fiduciaries dealing with TOLI policies.  It is available at www.TOLIHandbook.com.

 

  1. Worlds Centenarian Population Expected To Grow Eightfold By 2050, Renee Stepler, Pew Research Center, April 21, 2016, http://www.pewresearch.org/fact-tank/2016/04/21/worlds-centenarian-population-projected-to-grow-eightfold-by-2050/
  2. Bobby Samuelson, The Life Product Review, https://lifeproductreview.com

JH Hancock Settles Cost of Insurance Case For Over $91 Million

John Hancock, in a court filing posted last Friday in the Southern District of New York, agreed to pay just over $91 million to plaintiffs who participated in a lawsuit alleging the carrier had forced them to pay “unlawful and excessive” cost of insurance expenses in universal life policies.  This particular suit was different than others that have been filed against carriers because this suit alleged John Hancock should have lowered rates in its policies since mortality rates “declined significantly over the past several decades” and expectations of future mortality experience “likewise substantially changed in its favor.”  In the suit it was noted that John Hancock had “repeatedly stated in regulatory filings over the past 15 years that mortality experiences were substantially better than it expected.” Yet even though the mortality experience was much improved over expectations, “John Hancock has not lowered the COI rates it charges its customers,” even though the carrier “contractually promised” to review COI rates “at least once every 5 policy years.”

According to the original lawsuit there was a “mutual and reciprocal commitment” between the carrier and the members of the class action lawsuit – “policyholders agree to let John Hancock increase COI rates if expectations of future mortality experience get worse, and in return, John Hancock agrees to decrease COI rates on its customers when there is an improvement in mortality experience. John Hancock, however, has failed to live up to its end of the bargain.”

The Memorandum issued by the court pointed out the exhaustive nature of the case which started two and a half years ago.  The plaintiffs’ attorneys and staff reviewed “over 340,000 pages of documents (including over 2000 spreadsheets)” and had experts spend “23 days onsite at John Hancock’s offices in Boston, Massachusetts extracting reams of data on tens of thousands of policies.”

The settlement provides the members of the class action lawsuit with a $91.25 million cash payment, with the money “distributed directly to Class members, with no need for claims forms and no funds reverting to John Hancock.”

This case, 37 Besen Parkway LLC v. John Hancock Life Insurance Company, is separate from the case we wrote about on June 11th of this year.  In that case, John Hancock was being sued for actual cost of insurance increases on its Performance UL policies.  We will have an update shortly on an analysis of those increases.

The TOLI Handbook – Chapter 10: Understanding Equity Index Universal Life

Equity index universal life (EIUL) is the hottest product in the permanent life insurance marketplace. The “star of the life insurance show” according to one published report (1) that is touted as providing the upside of the equities market without the risk of loss. The carriers accomplish this by crediting the EIUL policy with the positive returns of an index (often the S&P 500 – without dividends) subject to a cap (a non-guaranteed maximum credited rate) while limiting the downside with a floor (typically 0%) so policy returns cannot be negative (through policy cash value will still go down).

We were flooded with replacement requests after the 2008-09 market meltdown from grantors holding variable universal life (VUL) policies tied to the equity market that had suffered big losses who believed the EIUL policy was more conservative than their existing policy.

While the product has a place in estate planning it has been misunderstood with many policies designed with expectations that may not be met. As a TOLI trustee, this is an issue. If a policy does not perform as expected it will be your job to ask the grantor to gift more to the trust – not a welcome task.

There are several reasons that the policy may not perform as projected in a sales illustration.

  1. The credited rate assumed in the policy is too high: Sales illustrations for EIUL policies were often shown with assumed crediting rates approaching 8%. While an 8% S&P 500 average may seem realistic it’s probably not. The return does not include dividends, which has historically been a rather significant portion of the total return. And though the floor will limit the downside, the cap limits the upside. For example, over the last forty years the S&P 500 has had eight losing years, but in that time, it has returned greater than 10% in over half of the years, creating a drag on actual returns credited in policies with caps 10% or less.
  2. Illustration games: Interest bonuses and multipliers can inflate the returns in an illustration. AG 49, an industry guideline effectively limited the maximum crediting rate that could be a shown in policy illustrations to approximately 7% but did not limit the use of techniques that inflate illustrated returns in a policy such as bonuses and multipliers. For example, while a sales illustration may show a credited return of 6% at the top of the page, the fine print below may point out that the policy includes a 1.25% multiplier effectively increasing the crediting rate of the hypothetical illustration up to 7.5%. Understanding the policy illustration assumptions is crucial when reviewing these policies.
  3. Changes in the Non-Guaranteed Elements: Changes in the cap or other non-guaranteed elements can drastically change the policy performance. For example, suppose a policy is issued with a 10% cap, 0% floor, 100% participation rate and an assumption that the index will return 7%. According to an online calculator (2), at a 10% cap, the interest credited to the policy would be 5.39, but if the cap dropped to 8.5% and all else, including the return in the index, remained the same the interest credited would drop to 4.76%.

These are just some issues a TOLI trustee must review and comprehend before accepting an EIUL policy. To learn more about this product and the steps you should take before advising a client to purchase one, please refer to Chapter 10 in the TOLI Handbook, a free 155-page guide for TOLI trustees or anyone dealing with life insurance. To get a free copy, click here.

 

  1. Tuohy, Cyril. “IUL the Life Insurance Star of 2017 Sales.” Insurancenewsnet.com, 26 Dec. 2017, insurancenewsnet.com/.
  2. JH IUL Translator.” JH IUL Translator,” Iultranslate.com.

ITM TwentyFirst Alert: Lawsuit Filed Against John Hancock for COI Increase

In February of 2017 we reported John Hancock had placed restrictions on certain inforce illustrations. At that time, we mentioned this was a possible precursor to a cost of insurance increase.  A year later the carrier notified the New York Department of Financial Services that it would be raising the cost of insurance (COI) on some Performance UL policies. Last month we reported the first customer announcements for the increase arrived at our NYC office.  Just as COI increases seem to follow inforce illustration limitations, class action lawsuits seem to follow COI increases.

Last week (June 5th), a lawsuit was filed in the Southern District of New York against John Hancock for “an unlawful and excessive cost of insurance (“COI”) increase” on “approximately 1,500” Performance UL policies.

The lawsuit details policy COI increases of 17%-71%, in line our with analysts’ findings.  The lawsuit alleges that increases up to 71% are “far beyond what the enumerated factors in the policy could justify.”

Letters announcing the increase blamed it on “expectations of future mortality and lapse experience,” but according to the suit “mortality expectations have continued to improve” and lapse experience, though “deteriorating…cannot justify any increase, much less one of this size.”  In addition, the recent tax cuts, “should have led to lower COI rates” since John Hancock recently announced, “the U.S. tax cuts will save it $240 million per year going forward.”

According to the filing, the carrier “told regulators as recently as February 2016 that its expectations did not warrant any change in projected COI rates,” and the lawsuit alleges John Hancock “admits” the increase was “driven” by the carriers’ goal to raise or meet its “profit objectives,” which is “not one of the enumerated factors a COI rate increase can be based on.”

The suit asserts the increase is “discriminatory and non-uniform” and “there does not appear to be any actuarial justification for the differences in the amount of the COI increase between policyholders.” For example, “the increase was applied to a standard male insured with issue age 73, but not to a standard male insured with issue age 65, and there is no actuarial reason to treat those two policies in such wildly disparate manners.”

The lawsuit calls for, among other things; compensatory damages and restitution and the “reinstatement of any policy that was surrendered or terminated following Defendants’ breach and unlawful conduct.”  The filing also calls for the court to prohibit John Hancock from collecting “the unlawfully and unfairly increased COI amounts.”

We have been analyzing the nature and amount of the COI increase and will be reporting back shortly on our findings.

A copy of the lawsuit can be obtained by emailing mbrohawn@itm21st.com/.