Allstate Sued by Firm Alleging Non-Payment of Death Benefits

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.

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/.

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.