A bill introduced in Congress could help spur sales of life
insurance in the secondary market by allowing policyholders to use the proceeds
from the sale of a life insurance policy to fund an account to be used for
paying long-term care expenses on a tax-favored basis.
Bill 7203, introduced by U.S. Rep. Kenny Marchant of Texas, a Republican,
and U.S. Rep. Brian Higgins of New York, a Democrat, has been referred to the
House Ways and Means Committee. The bill would allow policyholders to reduce
“the amount of gain from the sale or assignment of a life insurance contract … by
the amount of contributions to a long-term care account” as long as the
contribution was made “during the 30-day period beginning on the date of such
sale or assignment.”
Currently, in a life insurance policy sale, the policy owner is
taxed on the amount above the cost basis – typically the premium paid. This new
law would allow a policy sale to occur tax-free,
and then allow the policyholder to place the proceeds into a newly created long-term care account that would be “exempt
from taxation” as long as the account was used for paying for long-term care.
Tax-free distributions could be made from the
accounts to pay for “qualified long-term care services” as well as
“premiums for a qualified long-term care insurance contract,” for both the
beneficiary and the beneficiary’s spouse, and after the death of the account
beneficiary, the account would revert to the spouse.
The accounts created would be held in trust by a bank, an
insurance company, or “another person who demonstrates to the
satisfaction of the secretary that the manner in which such person will
administer the trust will be consistent with the requirements of this section.”
Any amount distributed from the account that was not used
exclusively for long-term care would be
includable in the gross income of the beneficiary and subject to a 20%
surcharge, except in cases where the beneficiary dies or becomes terminally or
chronically ill under current law.
The proposed law greatly expands the tax advantages of selling an
unneeded life insurance policy in the secondary market, and if passed, would
provide the policyholder with another reason to explore the life settlement
We will report back on the progress
of the bill as it moves through the
We have three office locations across the United States, and as I write this, none will see 40 degrees as their high-temperature today, so it is no wonder we are looking forward to heading south to the sunshine of Orlando, Florida, for this year’s Heckerling Institute of Estate Planning session from January 14-18. However, it is much more than that.
It has been about 15 years since we attended our first Heckerling
session. Back then, we were pioneers in the trust-owned life insurance (TOLI)
policy review space. Before we came to market, trustees had few resources,
except local life insurance agents, to help review their portfolio. Our service
solved a significant problem: for the first time, TOLI trustees could receive a
non-biased policy review (our Standard Solution). We followed that up with a
full-service outsource offering (our Managed Solution) that provided dedicated
experts in trust administration and policy management to not only track the policy
but to handle all back-office administration and equally important, to solve
policy issues. We helped mitigate liability by creating the trust file documentation
necessary to prove a prudent process occurred.
Last year, again taking a pioneering approach, we created the
first trust company focused on life insurance (Life Insurance
Trust Company) after clients approached us looking for a trustee who would
take some or all their ILITs and not compete with them on their other assets.
Over the years, ITM TwentyFirst has grown by listening to
clients. Going to Heckerling is one way we get to do that face to face. When we
first exhibited there, we were focused only on prospecting, but now when we go,
we get to visit with clients. Many of the exhibitors at Heckerling are trust
officers at some of our more than 200 bank and trust clients, and we have
worked with and received referrals from many of the attorneys speaking at the
sessions. The satisfaction of going to Heckerling is not just the generation of
new business, though thankfully that still happens. The real fulfillment is seeing clients we have had for
over a decade – peers that have been a
part of our growth and have grown their business alongside ours.
It is also interesting to see the continued expansion in the industry we helped develop and
to welcome others who are also trying to help trustees maximize this often-misunderstood
asset of life insurance. We are proud of
our part in helping to initiate and lead this progress.
This year, Leon Wessels, who is spearheading growth at our
new trust company, and John Barkhurst, who is heading up business development
on our TOLI services, will be attending.
Please take the time to stop by and bring along your toughest problems about
the life insurance policies you handle. You will not find two more capable people
on the exhibit hall floor to solve them.
If you stop by and see them
at booth #128, you can also find out how to get a free PDF copy of The TOLI Handbook, the most
comprehensive guide available for TOLI trustees and take the ITM TwentyFirst
TOLI Challenge for the chance to win a prize.
want to thank all ITM TwentyFirst clients
for another remarkable year of growth. Without the support of our partners at
banks, trust companies, family offices, and
law firms across the country, we could not sustain the growth that has made us
the largest manager of in-force life
insurance in the country. So, thank you
for our growth over the years has been the quality of our team. From the beginning, we have focused on internal
education to provide our staff with an edge in the market, and over the years
we have also trained peers and regulators through our outreach programs. In 2018, we released a free PDF entitled the
TOLI Handbook, the culmination of over a decade of real-world insight
translated into a guide for the management and administration of TOLI trusts.
The PDF is available for free at TOLIHandbook.com.
We at ITM
TwentyFirst have always listened to our clients. We started by creating a software program
that TOLI trustees could use to manage policies. When clients asked if we could
do more, we created the Managed Solution, total outsourcing of TOLI trust administration
and policy tracking and remediation. In
the last few years, we heard from clients
looking to offload a portion or all of their ILITs to a firm that would not
compete with them in other areas and in 2018 we started the Trust Owned Life
Insurance Company (https://lifeinsurancetrustco.com/) the only trust company in the US focused on
life insurance trusts. Our initial year
has been very promising, and we look forward to helping trustees deal with this
news in the TOLI industry this year? It
had to be the changes in the estate tax laws brought about by the signing of
the Tax Cuts and Jobs Act by President Trump. The law raised the federal estate
tax exemption from $5.49 million to $11.18 million and dramatically
lowered the number of estates
subject to the federal estate tax. It is estimated that with the higher
exemption amount less than one of every 1,000 estates will subject to the tax.
mean more work for a TOLI trustee who, besides managing a policy, may now have
to justify its value to a grantor. A
savvy trustee will explain to the client that the estate tax law changes made
the policy in the trust more – not less – valuable. If the grantor no longer needs the policy to
pay estate taxes, that just means that more of the benefit is going to the
beneficiaries – and wasn’t that the goal in the first place?
grantors will still want to make changes – perhaps lower the death benefit or
limit the gifting that must occur going forward. This will mean more remediation services will
be required for a TOLI portfolio and we have found this is the weakness in many
TOLI trustee service platforms. Having a
life insurance expert on staff will be a necessity going forward unless you
outsource that job. Remember that even
if the grantor no longer thinks they need as much death benefit – or any death
benefit – your job, actually your responsibility as a trustee, will still be to maximize the asset in the trust.
we have seen trustees slip is policy replacement analysis. Some agents are using the changes in the
estate tax as a marketing tool to engage grantors and recommend a change to the
policy in their trust. The sale of
permanent life insurance in the estate planning market has dropped. LIMRA, an
industry organization, reported that the
total number of policies sold market wide dropped by 3% in the 1st
quarter of 2018. The biggest drop was in
guaranteed universal life (24%), a policy often used in estate planning. Variable and index universal life policies
saw gains, but only because the industry has shifted its marketing from death
benefit sales to income retirement sales and these policies are being touted as
excellent vehicles for that use. (2)
Agents that have focused on the estate planning market are simply not
selling the volume of new policies they have in the past and have redirected
efforts to replace existing
policies. Throughout this year – in
blogs and education programs – we have pointed out “bad” replacement
efforts we have caught. For one brought
to us by a prospect for review two years after the fact, we could do nothing, and he wound up writing a high five-figure check to make the client
whole. The prospect is now a client of our Managed Solution.
sign – the clamor among the states and associations for a Best Interest
Standard. New York has led the charge with a regulation that would require
agents to provide “the product that best
reflects the customer’s interest,” not “what is most profitable to the
seller.” The Certified Financial Planner (CFP) Board already has standards in
place that all CFP designees act with
“honesty” and “integrity,” always “in the client’s best interest,” placing the
interests of the client above the interests of the CFP. (3)
One area we
have seen increased activities this year is the life settlement market. The sales of life insurance in the secondary
market has been trending up in the last few years, and though 2018 statistics
are not in the conversations we have had with those in that market lead us to
believe that sales will be up again. The
changes in the estate tax have had a positive effect on sales and a change in
the taxation of a policy for a seller has also helped. In the past,
a seller of a policy would pay taxes on the difference between the cost basis
and the sales price – but there was a twist.
Since 2009, tax laws made the seller subtract the cumulative cost of insurance charges assessed against
the policy from the cost basis creating a higher tax bill. The new tax law did away with that, reducing
the tax burden on those who sell their policy.
insurance (COI) increases continued in 2018 with well-known carriers like John Hancock and Lincoln National raising
costs on legacy policies. We reported on
several court cases filed against
carriers that had raised their costs and in each case the carrier had to “give
back” some of the extra charges, though whether it was enough to keep others
from raising costs remains to be seen.
We at ITM
TwentyFirst are grateful for a challenging, but eventful
year, one that has seen the company grow dramatically. We now have locations in four cities and
cover the country from coast to coast. Our product line is expanding, and our company has grown to over
150 team members while still keeping in place
the high service level standards we are known for.
We are grateful
for the opportunities ahead of us and again thank you for your trust and your business.
For the last few years, we have tracked the dividends paid by four large mutual carriers whose
main product offering is whole life.
These carriers are owned by their policyholders, not stockholders and
operate with a long-term business view. Unlike most life insurance carriers, they
sell their products through a career agency system – a dying breed. Their dividend rate and payments are a major
marketing tool for their agents and dropping dividends is never a major selling
point. But in the last decade, even they
succumbed to the historic low-interest rate environment and dividends trended
The big four carriers
we have tracked – Northwestern Mutual, Mass Mutual,
Guardian Life, and New York Life expect higher dividend
payouts for 2019.
Northwestern Mutual: Will pay out $5.6 billion, up from $5.3 billion in 2018
Mutual: Will pay out $1.72 billion, up from $1.6 billion in 2018
Will pay out $978 million, up from $911 million in 2018
New York Life:
$1.8 billion, up from $1.78 billion in 2018
four carriers appear to have held or raised dividend
investment rates (DIR), with none dropping,
a good sign. The DIR drives the actual
dividend amount paid.
Northwestern Mutual: At 5%, up from 4.9% in 2018
Mutual: Stays at 6.4%, as in 2018
Stays at 5.85% where it has been since
New York Life:
Although they have not released yet, it appears
to stay at 6.2%, where it has been since 2015
Overall, the dividend direction is positive. We will not be seeing the 8% plus dividends of the 90s or early 2000s, but the worst seems to be over with dividend interest rates heading up, not down. And that is a reassuring sign for those of us who manage whole life policies.
In a future blog, we will
review the components that makeup and drive the dividend calculation.
While the DOL fiduciary rule, which went into partial effect in June raises the bar for those advisors working with annuities and investments in retirement accounts, no corresponding federal regulation applies for life insurance sales in the trust-owned life insurance (TOLI) market.
New York state has the most stringent law about best standards for life insurance and annuity sales. The law, which will begin to take effect in August of 2019, exempts some types of life insurance transactions, including corporate-owned (COLI) or bank-owned (BOLI) life insurance and those dealing with the sale of life insurance in the secondary market (the state already has regulations dealing with life settlements). But the law provides strict guidelines when dealing with traditional life insurance sales to consumers, including TOLI sales.
The law requires any life insurance salesperson to “act in the best interest of the consumer” and any product recommendation must “be based on an evaluation of the relevant suitability information of the consumer” and reflect “the care, skill, prudence, and diligence that a prudent person acting in a like capacity… would use under the circumstances.”
In making any recommendation “only the interests of the consumer” can be considered and though no limitations are placed on compensation, the law requires that “compensation or other incentives permitted” should not “influence the recommendation.”
While a few other states, as well as some national insurance organizations are also mulling over similar regulations, today the TOLI trustee has an obligation to their customer that is much higher than a life insurance salesperson or advisor. In most instances a life insurance sale must only meet a suitability requirement, a low bar and this has created issues we at ITM TwentyFirst have seen firsthand – issues that could cause a TOLI trustee to write a check, or worse, wind up in court (and possibly write a bigger check).
In the past year, we had a prospect (who later became a client) write a high six-figure check to make a grantor whole for a policy replacement that occurred two years prior. The transaction, which we could not undo, put the trust in a worse position than the existing policy. The trustee, who largely because of that transaction later became a client under our Managed Solution program, had followed the advice of a local life insurance agent, a mistake on his part.
Policy replacements have become an area of increased liability for trustees. In the TOLI Handbook, available here as a free PDF download, we write about two replacement transactions. Either could have placed the trustee in hot water – and possibly a courtroom. One replacement, pushed hard by an agent who was also a good friend of the grantor would have replaced an existing policy in the trust with one with demonstrable costs four times as high over the lifetime of the policy, clearly violating Section 7 of the Uniform Prudent Investor Act (UPIA) dealing with “appropriate and reasonable” costs. In another replacement case, an agent advised a TOLI trustee to replace a portfolio of whole life contracts with a new equity index universal life policy that would have provided the trust with fewer guarantees and a death benefit worth $900 thousand less. The trustee has a duty to investigate any transaction, including all the options for the existing policy – in this case, the agent never reviewed any.
As a TOLI trustee, you have a fiduciary responsibility to ensure that every transaction – either a new policy sale or replacement is not only suitable for your client, but also in your client’s best interest. Until regulations change you will be sitting on the other side of the table from most life insurance salespeople.
A recent online survey about life insurance found that 33% of life insurance policy owners do not understand how their policy works. (1) I suspect that this number is probably low. Maybe the other 67% probably think they know how it does, but I imagine they could get a refresher lesson on how it actually does. Even if they do understand how it works, do they understand how a decade of low-interest rates and equity market volatility affected their policy?
TOLI trustees should be contacting grantors to explain to them just how their policy works. Doing so will provide the grantor with greater clarity about their policy and provide the trustee with a chance to deepen the client relationship, bringing benefits to both grantor and trustee.
For the grantor who has been dutifully paying premiums (and trust fees) for years, the discussion will reinforce the reasons for taking the policy out. Even though the changes in the federal estate tax may have greatly reduced the number of people subject to the tax, life insurance is still a worthwhile financial investment and that point can be driven home by the discussion. Just because the proceeds will not be gobbled up by taxes does not mean the proceeds are no longer as valuable – in fact, they are now more valuable since, for many, one hundred percent of the benefit will go to the beneficiaries, a plus.
For some policies, the last ten years of low-interest rates have been a drag on performance and now is the time to review those policies with your clients – when interest rates are ticking up and fixed investments (which most life insurance policies are) have a rosier future. Perhaps the premiums will have to be increased to keep the policy on track but the policy, if managed correctly, is still a valuable asset.
Many of your grantors are reassessing their financial and estate planning future, given the changes and market volatility of the last ten years. Once they are comfortable their life insurance policy is secure and valuable, you can move on to other subjects that may provide additional revenue for your firm.
For many of your clients, retirement income is a major concern. Some may feel they do not have enough assets to support their lifestyle, some simply have not put a retirement funding plan in place. In either situation, financial planning services can lead to additional opportunities for your firm. For example, clients worried that they may “run out of money” can be introduced to annuities as a funding vehicle for a portion of their assets to ensure a basic lifetime income.
Higher net worth clients, with well-funded retirements, still need your services. Introduce your investment options as you develop a relationship with them. These clients also have issues other than money you can solve. Most wealthy individuals struggle with how much to pass on to their children and how to structure the inheritance. You can bring great relief to ILIT clients by introducing other trust and estate planning services that can solve their problems.
Use the discussions with the grantors to open a dialogue with the beneficiaries of the ILIT that you control. Most TOLI trustees we speak with rank retaining the asset – the death benefit after the death of the insured – as one reason for handling ILITs, yet few put in the time and effort to cultivate the next generation of wealth. Why can’t the beneficiaries be clients now so that retaining the TOLI benefit in the future will be cemented?
There are many reasons for contacting grantors to explain the policy. For clients of ITM TwentyFirst, you have one of the best tools in the industry available to do just that. Our annual policy reports provide all of the information needed to have a fruitful discussion with your client and for clients of our Managed Solution, a remediation specialist is available for any questions or policy modeling that might be needed.
Open the lines of communication with your grantors, you will be glad you did.
1. 54% of Americans Own a Life Insurance Policy, But One-Third Not Exactly Sure How It Works, Mike Brown, September 19, 2018 lenedu.com
In 2013, we wrote about the sale of Lincoln Benefit Life, an Allstate company, to Resolution Life Holdings, Inc. It was the first purchase in the States for the UK company, run by British entrepreneur, Clive Chowdry, whose ambition, according to the Financial Times, was to “buy up and roll together a number of life assurance businesses and to run them for cash instead of hunting for new customers.” The runoff administration business model employed by the company and by some others who have entered the insurance field is designed to maximize profits on a closed book of business. At the time, we worried about cost of insurance increases in the block, but now comes a lawsuit accusing Resolution from failing to pay “death benefits owed” to Emergent Capital, Inc., a Boca Raton, Florida, life settlement company that owned the policies in question. Although the lawsuit references only three policies directly, it notes that Emergent is owner of over 50 Lincoln Benefit Life policies.
Allstate is alleged in the lawsuit to have pursued the sale to Resolution without proper vetting and without the “good faith” that it owed Lincoln Benefit policyholders. The suit claims Allstate had a “fiduciary” duty to act in the“best interests” of policyholders, “use diligence and care in the investigation and evaluation of Resolution as a prospective purchaser,” and “refrain from acting solely on the basis of its own financial interests in the sale.” The complaint asserts that by “choosing to sell its wholly-owned subsidiary Lincoln Benefit to the highest bidder, Allstate improperly placed its own financial interests ahead of those of the insurance policy owners” and “ignored information readily available to it regarding Resolution’s well known claim practices that violate statutory and common law rules.” The suit claims that it was “understood in the life insurance industry that, at the time of the Lincoln Benefit sale to Resolution, Resolution may have had an internal practice and procedure of challenging and contesting every life insurance policy claim involving policies having life benefits that exceeded a certain high-level dollar amount.”
The three policies referenced in the lawsuit were issued in 2007 to trusts created by the insured, and shortly after policy issue, all three trusts “entered into a premium financing arrangement with Emergent,” apparently with the policies as collateral. Within approximately three years of policy issue, all three policies had their ownership changed to Emergent. Lincoln Benefit was alerted via “fully completed and fully executed” Lincoln Benefit service forms that policy ownership was changed with “the specific knowledge and consent of Allstate’s wholly-owned subsidiary, Lincoln Benefit.” After the change in ownership, both Lincoln Benefit and then Resolution accepted premium payments from Emergent.
According to the suit, Allstate “created and maintained an internal committee to research, vet, and approve qualified and reputable insurance premium financing companies, like Emergent, with whom it would do business and recommend to prospective life insurance applicants to help them afford to pay the exorbitant insurance policy premiums charged by Allstate and its wholly-owned subsidiary Lincoln Benefit.” Emergent “was one of a small group of life insurance premium financing companies affirmatively approved” by the carrier and its subsidiary company.
When the insured on each policy passed away, Lincoln Benefit took the position that death benefits need not be paid on the three policies because they and “others similarly situated had never been active or in force” since “any life insurance policy issued by Allstate’s wholly-owned subsidiary Lincoln Benefit (whose assets were sold by Allstate to Resolution) and financed through a life insurance premium finance arrangement, like the one the Frankel ILIT, the Matz ILIT and the Pohl Trust, and others, had with Emergent, constituted a “stranger owned life insurance policy” (or “STOLI”) and, therefore, were all void ab initio.”
Emergent is asking that compensatory and punitive damages be awarded in the case and estimates compensatory damages alone to “exceed $32 million..with the potential of exceeding $100 million.”
While we have Lincoln Benefit policies under management we have never had any issues with death benefit payments or even service levels at the carrier since the sales transaction took place.
We will report back with updates as the suit winds its way through the court.