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/.

The Life Insurance Trust Company Solves Major Problems for Veteran Life Insurance Agents and Advisors

Four years ago, it was reported that the average age of a financial advisor in America was 51, with 43% over the age of 55 and many heading towards retirement (1). One year later, an industry publication noted that the average age of a US life insurance agent was even higher — 59 (2).

Many veteran life insurance agents have worked for years building a book of business by focusing on entrepreneurs, business owners, and professionals — in other words, the high-net-worth market. It has served them well and now, as they begin to look back on their careers, they are also looking forward to their options.

One option is to sell their book of business to a younger associate. To be successful, this process should be carried out over a number of years with the junior agent developing relationships with the clients. Most veteran agents became successful because their practice was relationship based, not transaction based; handing off the business to another is hard unless there is a relationship.

Another option is to simply slow down — to throttle back the practice and take more time to enjoy life. This can mean shorter days and longer vacations, still with one foot in the office door to keep the relationships strong and develop additional business — although not at previous levels. For many life insurance producers, that option is appealing.

Both options present challenges, but one challenge can be resolved rather easily. Unlike the financial services market in general, life insurance has not kept up with the technological advances in investment management. Software and online services make investment portfolio selection, as well as asset tracking and reporting, easier than ever, thereby cutting office costs. The same cannot be said of life insurance, where policy tracking and management is still a cumbersome and expensive back-office process.

Clients of most veteran life insurance producers utilize a trust company to house their policies for estate planning and distribution reasons. A new trust company — the Life Insurance Trust Company — is providing services that will make clients happy and agents’ lives much easier by affording them an opportunity to lower costs and increase services.

The Life Insurance Trust Company utilizes one of the most sophisticated policy management systems available today. Developed internally over 15 years, it provides an annual review that not only tracks policy performance but also alerts all to policy triggers, such as conversion options.

The Life Insurance Trust Company utilizes the back-office services of their affiliated company, ITM TwentyFirst, the nation’s largest manager of TOLI trusts, so the agent can be assured that premiums are paid on time. With specialized insurance professionals on hand, the Life Insurance Trust Company can alert the grantor and agent to any issues that arise and contact the carrier to obtain the information necessary to make prudent decisions about the policy.

Although the trustee owes a fiduciary duty solely to the beneficiary, they understand the life insurance business and its products and will work together with the advisor to maximize the asset in the TOLI trust.

Because they do all the heavy lifting by gathering information from the carrier, the agent is relieved of the past back-office expense, which lowers their overall office expenses while maintaining or even increasing their client service levels.

For more information about the Life Insurance Trust Company, visit https://www.lifeinsurancetrustco.com/, or contact Leon Wessels at 605.574.1703 or lwessels@lifeinsurancetrustcompany.com.

 

  1. Melanie Waddel, “43% of Advisors Older Than 55: Cerulli,” ThinkAdvisor.com, January 21, 2014.
  2. Andrea Wells, “Young Agents Survey: The Next Generation Steps Up,” InsuranceJournal.com, April 20, 2015.

 

TOLI Trustees Can Gain Guidance From 401(k) Lawsuits (and the TOLI Handbook)

In the past, we have written about 401(k) lawsuits flourishing and what trust owned life insurance (TOLI) trustees can learn from them. This week, a research paper concerning 401(k) lawsuits landed on our desks that can provide guidance to trustees handling life insurance. The report published by the Center for Retirement Research at Boston College notes that “over 100 new 401(k) complaints were filed in 2016–2017 — the highest two-year total since 2008–2009” (1).

The number of TOLI lawsuits has not increased like the number of 401(k) lawsuits has … yet. Regulations around 401(k) plans have been in place much longer than those concerning TOLI trusts. The Employee Retirement Income Security Act of 1974, which governs 401(k) plans, is almost 45 years old, but lawsuits have only proliferated over the last ten years. In the TOLI world, the Uniform Prudent Investor Act and the Office of the Comptroller of the Currency’s Unique and Hard-to-Value Assets handbook are much more recent guides.

The guides mentioned above share one common characteristic that was pointed out in the research paper — they do not “spell out” specific directions for managing an asset. They all provide general guidance, but it is up to the trustee to take that guidance and develop a process to prudently manage the assets. ITM TwentyFirst has just published a free handbook that provides more specific direction.

The authors of the research paper cite three main areas of contention in the 401(k) world that can be applied to the TOLI world.

  1. Inappropriate Investment Choices: In the 401(k) world, this relates to options in the retirement plan. In the TOLI world, this could relate to the separate account investments in a variable policy or even a broader application — the choice of the policy type. Variable life investment options are chosen by the trustee, not the carrier, which layers in another trustee responsibility. (See Chapter 9 in the TOLI Handbook for guidance.) Moreover, the asset in a TOLI trust must match the trust’s temperament and goals as well as the grantor’s financial situation. (See Chapter 12 in the TOLI Handbook for guidance.)
  2. Excessive Fees: 401(k) investment fees are easy to see, but in the TOLI world, the costs within a policy can be much more opaque. We have witnessed situations in which trustees were ready to accept replacement policies that had internal costs that were 3–4 times more than the existing policy. Why? Because they had no process in place with which to review the new policy and instead relied on the word of the salesperson. Without a process in place, a trustee could easily be held liable. (See Case Study #5 starting on page 128 of the TOLI Handbook for guidance.)
  3. Self-Dealing: According to the Boston College research paper, self-dealing occurs when a fiduciary acts in “its own best interest rather than serving” its clients. In the TOLI world, we have had our own lawsuits in this area — one in which a major bank that had received a large commission on a policy in its trust fought back against a lawsuit by beneficiaries who charged that the trustee had “violated the prudent-investor rule” (see page 14 in the TOLI Handbook for more information on how), and another in which trustees were held liable for over one million dollars when the beneficiary charged that they had breached their fiduciary duties. (See page 17 in the TOLI Handbook for further explanation.)

Many pundits believe that the trustees of trust-owned life insurance policies will encounter increasing liability in the coming years. The well-informed trustee will be less likely to be among those facing litigation. The TOLI Handbook – available here – can help inform.

 

  1. George S. Mellman and Geoffrey T. Sanzenbacher, “401(k) Lawsuits: What Are the Causes and Consequences?” Center for Retirement Research at Boston College, May 2018.

 

ITM TwentyFirst Publishes Free Trust Owned Life Insurance (TOLI) Handbook

As a decade plus provider of services to the TOLI marketplace, ITM TwentyFirst has developed a reputation as the expert in the trust owned life insurance arena. A pioneer in the field with the introduction of a web based administration portal for TOLI trusts in 2002, ITM TwentyFirst became the first company to offer total outsourced TOLI administration and policy management in 2007. In 2017 its affiliated entity, Life Insurance Trust Company became the first trust company in the United states to focus exclusively on life insurance, offering trust companies the opportunity to off load the asset to a firm that would not compete in other areas.

Over the last year ITM TwentyFirst has developed a handbook for TOLI trustees and advisors dealing with life insurance, especially in a fiduciary capacity. The 17-chapter book was developed and written by in-house specialists to provide internal education for staff, but was adapted and is being released to the public as a free downloadable manual. ITM TwentyFirst has always championed peer education developing a robust internal program for team members, as well as ITM TwentyFirst University that offers free CE for the industry. The company blog has provided timely industry insight for almost 6 years.

The handbook is a practical reference guide for those who are aware of life insurance, but not necessarily expert. It provides an overview of the responsibilities of a TOLI trustee and the guidance to live up to them.

The TOLI Handbook includes many actual cases studies and anecdotes drawn from the day to day work of ITM TwentyFirst team members. It is being published as a live document and is expected that it will be updated periodically as it adapts to the changing marketplace and industry. We believe that it presently represents the best single source of information available for managing TOLI trusts and life insurance. To receive a free copy of the TOLI Handbook, go to http://www.tolihandbook.com./

The TOLI Handbook Chapter Listing:

Introduction

Chapter 1 – The Irrevocable Life Insurance Trust (ILIT)

Chapter 2 – The Responsibilities of a TOLI Trustee and Some Guidance

Chapter 3 – Developing a TOLI Administration System

Chapter 4 – An Introduction to Life Insurance

Chapter 5 – Whole Life Insurance – A Closer Look

Chapter 6 – The Mechanics of the Universal Life Chassis

Chapter 7 – Current Assumption Universal Life – A Closer Look

Chapter 8 – Guaranteed Universal Life – A Closer Look

Chapter 9 – Variable Universal Life – A Closer Look

Chapter 10 – Equity Index Universal Life – A Closer Look

Chapter 11 – Why Did the Cost of Insurance Increase in My Policy?

Chapter 12 – Selecting the Best Policy

Chapter 13 – Taxation of Life Insurance

Chapter 14 – Understanding Life Settlements

Chapter 15 – Understanding Life Expectancy Reports

Chapter 16 – Policy Remediation

Chapter 17 – Closing Thoughts

First John Hancock Cost of Insurance (COI) Increase Letters Arrive

In February of 2017 we reported John Hancock had placed limitations on inforce ledgers for certain Performance UL policies.  A year later, in February of this year, we wrote that The Life Settlements Report, a trade publication, reported that John Hancock had voluntarily notified the state of New York that it would be raising the cost of insurance (COI) on 1,700 Performance UL policies.

Today, our New York City office received the first official COI increase announcement from the carrier.  The letter, dated May 7th, noted that the carriers’ “expectation of future experience has changed” and for that policy, the cost increase would occur on the next policy anniversary date.

The carrier provided several “options to manage the increase,” including; increasing the premium to keep the current death benefit in force, reducing the death benefit to “keep the current premiums the same,” or maintaining both “current death benefit and premium payment,” though if that option were chosen, “your policy will not remain inforce as originally projected.”

The carrier also offered the option to surrender the policy, though they “strongly encourage” policy holders “to consider the value of your policy and the goals you established when you purchased it” before taking that course.

The carrier provided an 800 number to contact “dedicated service representatives” for assistance and “personalized information and illustrations specific to your policy,” and noted they are “committed to working with” policy holders to choose an option that “best meets their needs.”

We are not sure of the size of the COI increase. According to a John Hancock representative contacted by our New York City office, the amount of the increase will vary by policy.   The representative also noted that roughly 4,000 Performance UL policies were evaluated and approximately 1,400 will be affected by the increase, though we cannot officially verify that.

It appears that inforce illustrations for the policies affected will begin to flow in the next few weeks, and as they are received and analyzed we will report back on our findings.

New Report on Interest Rates and Life Insurance Carriers Notes Concern

In the past few years, we have had no shortage of entries about the historic low-interest-rate environment and the beating that life insurance policies took because of it.  Whole life dividends have dropped, current assumption universal life performance has been driven down, and in some cases, cost of insurance (COI) increases have raised carrying costs by over 200%. All primarily because of low-interest rates.  We have even written about the effect of the low rates on long-term care insurance policies, though we do not deal with them.  At times it has been downright depressing to report on well-known industry executives decrying the low rates were “destroying the viability of insurance companies” and leaving us in an “environment…unsustainable over any reasonable period.”

In the last year or so, we have seen a rise in interest rates with the 10-year Treasury recently crossing the 3% mark. It is only natural to think of a rise in rates as good news for the insurance industry.  Carriers collect premium dollars, invest the monies in fixed instruments and then pay out the benefits in the future so rising rates would be a plus, right? Not so fast.

Two weeks ago (April 23, 2018), AM Best released a special report in which it cited continuing low rates, a flattening yield curve, regulations, potential for market corrections and the need for innovation as reasons for a “negative outlook” on the US life and annuity market (1).

One issue stood out – the potential for an abrupt increase in interest rates.  As pointed out in the report, carriers “prefer gradual increases” in interest rates that “allow them to adjust their credited rates on liabilities and their asset portfolios to optimize returns.”

The report noted current underlying factors –  increasing wage growth, the effect of the Tax Cuts and Jobs Act and tariffs on steel and aluminium – that “could cause a rapid increase in interest rates.”

Wages have grown at the fastest pace since 2009 (2).  A recent Wall Street Journal article noted that firms are competing to “hire scarcer workers.”  The same article reported inflation hit the Fed’s 2% target and that a “sustained pickup in inflation in the months ahead” driven by trade tariffs and a weak dollar could “push up prices” on imports (3).

The effect of the Tax Cuts and Jobs Act may not be the only reason the federal government debt is ballooning, but it is expanding at a fast pace and that may increase interest rates. The Treasury announced in an April 30th Press Release that during the January to March 2018 quarter, it had borrowed $488 billion, a record for that period (4).  A Bloomberg report noted that spending increased at three times the pace of revenue growth in the October-to-March period (5).

A study that measured the influence of budget deficits on interest rates showed there is a “statistically and economically significant” relationship between deficits and long-term interest rates. It projected that when the deficit to GDP ratio increases by one percentage point, long-term interest rates increase by roughly 25 basis points (6).

According to a recent Congressional Budget Office (CBO) report, federal debt held by the public is projected to rise in a relatively straight-line fashion from 78 percent of GDP at the end of 2018 to 96 percent of GDP by 2028. That percentage would be the largest since 1946 and well more than twice the average over the past five decades (7).

If the study and projection are to be believed, we can expect long-term interest rates to increase by as much as 4.5% over the next decade.  The increase may not lead to a harmful outcome for insurance carriers – if the increases are not dramatic, but slow and steady. A slow, smooth increase allows carriers to “adjust crediting rates on existing products, reshape their portfolio durations and help maintain credit quality for an optimal return that would satisfy their risk-based capital ratios and risk tolerances. (1)“

But a quick jump in rates could cause issues, as the AM Best report points out, including disintermediation with policy holders dropping life and annuity policies for higher returns elsewhere in instruments like bank CDs.  Carriers with “minimal surrender protection” would be hardest hit. Policyholders left could take advantage of low-cost policy borrowing opportunities to increase loans on policies. Both events would cause liquidity risks for carriers.  In the past when this has occurred, carriers had to liquidate investments prematurely to raise cash for surrender and loan payments.

According to the AM Best report, the search for higher yields has caused insurers to lengthen bond maturity with “portfolios at their longest durations in at least 17 years,” with those at the short end – maturing in less than five years – “at the lowest point in nearly two decades.”

The effect of interest rates on bond prices is somewhat dependent on bond duration.  AM Best data shows the current market value of life industry bonds is about 6.3% over book value. However, according to the report, a 100 basis point change in interest rates would bring the market value below book value, creating unrealized losses and the unrealized gains that accrued while rates were at historic lows could quickly start to reverse, which would negatively affect reserves.  The saving grace is the “longer-tail nature” of most insurance carrier liabilities, but again, liquidity needs would exacerbate the problem.

The life insurance market and insurance carriers, in general, have weathered an extremely fierce economic storm in the last decade. Let’s hope the next few years bring smooth sailing with gently increasing rates and a calm financial market.

 

 

  1. Best’s Special Report, Abrupt Interest Rate Hike Could Pose Challenges to Life Insurers, AM Best, April 23, 2018
  2. America Gets a Raise: Wage Growth Fastest Since 2009, CNN Money, February 2, 2018
  3. US Inflation Hit Federal Reserve’s 2% Target in March, Harriet Torry and Andrew Tangel, Wall Street Journal, April 30, 2018
  4. US Treasury Press Release, https://home.treasury.gov/news/press-releases/sm0375
  5. Mnuchin Sees Solid Treasuries Demand After Record U.S. Borrowing, Saleha Mohsin and Randy Woods, Bloomberg.com, April 30, 2018
  6. Budget Deficits and Interest Rates: What Is the Link?, Edward Nelson and Jason J. Buol, Federal Reserve Bank of St. Louis.
  7. Congress of the United States Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028

 

 

 

Carrier Offers Life Policy Buyback – Another Trustee Decision Dilemma

Lincoln National is offering some policy holders the opportunity to receive an “Enhanced Cash Surrender Value” if they surrender their life insurance policies within a specific time frame.  We began to receive letters from the carrier a few weeks back, along with a Frequently Asked Questions (FAQ) brochure explaining the offer.

The offer is not unlike offers extended to variable annuity policy holders after the 2008-09 financial crisis. At that time, holders of variable annuities with guaranteed minimum income benefits (GMIB), typically in the 6-7% range, were offered additional incentives over and above their annuity’s value to surrender the contracts.   Those offers continue today with two carriers in the last few months reportedly “enticing” consumers to surrender their annuity “in exchange for some incentive such as a cash lump sum or another product from the insurer.” In fact, variable annuity buyout offers have occurred “among at least one or two carriers every year for the past four to five years.” (1)

According to a report by Moody’s, “companies selling VA’s with guarantees misestimated and underpriced” the product. The mistake “forced insurers to take significant, unexpected earnings charges and write-downs.” (2)

Lincoln’s offer is the first enriched buyback offer we have seen for life insurance policies. Some policies offer a contractual return of premium or enhanced value to surrender a policy at specified points in the future, but we have never received an unsolicited offer.

According to information from the carrier’s FAQ, the offer is being extended to those policy holders who have “stopped making regular payments” on their policy, and it is determined by a formula based on policy “cash surrender value, the length of time…[the]policy would remain active without future premium payments, and an actuarial calculation incorporating mortality and interest assumptions.”

Like carriers offering variable annuity buybacks, Lincoln will be helped by releasing reserves tied to the policies. According to the FAQ, “Lincoln must hold financial reserves in accordance with statutory and accounting regulations.” If a policy owner surrenders the policy, “Lincoln would no longer be responsible for the death benefit on the policy, allowing the release of these financial reserves and redeployment of the funds for a different use. This option could be mutually beneficial to both you and Lincoln.”

So, does it even make sense to surrender a life insurance policy – even if receiving an enhanced value? It depends on specific facts and circumstances, like all policy decisions. For these policies, no out-of-pocket premium is being paid. How long will the policy last without additional premium costs? What is the health of the insured? Will the policy last past the life expectancy of the insured without additional cash contributions? If not, how much more cash would have to be put in for the policy to run to life expectancy? Should a life expectancy report be obtained to provide another data point? These are some of the questions that must be asked before a decision is made. Lincoln believes that buying the policy back for an enhanced value makes economic sense for them. If you are a trustee, you will have to decide whether it makes sense for the trust and document the prudent decision-making process to reach your conclusion. It is all part of a trustee’s job.

 

  1. Insurers Still Grappling with Costly Variable-Annuity Promises, April 13, 2018, Greg Iacurci, http://www.investmentnews.com
  2. Moody’s Investors Service, Unpredictable Policyholder Behavior Challenges US Life Insurers’ Variable Annuity Business, Global Credit Research, June 24, 2013