Shared Characteristics of Long-Term Care and Life Insurance Cost Increases

Sally Wylie, a retiree living on an island in Maine, was stunned when her long-term care (LTC) policy premium almost doubled. According to the Wall Street Journal article that recounted her dilemma, the one-time learning specialist took on part-time work to help with the finances, and she and her husband cut back on expenses to afford the premium for the policy that was purchased to be their safety net (1).

Permanent life insurance has experienced similar, large cost increases. Because of articles we published in the last few years on this subject, we have received more than one hundred emails from consumers stung by the cost of insurance (COI) increase on their life policies. Some people, like Sally and her husband, scrimp in other areas to pay the increased policy costs. Others have simply dropped coverage, which I suspect many long-term care policyholders have also done.

The cost increase dilemma facing life and long-term care policyholders stems from the decade-long, historic low-interest rate environment. Insurance carriers take in premiums, invest them and (hopefully) generate enough Moodysinvestment income to pay out future benefits and still make a profit. The general accounts of most insurers are invested primarily in high-grade corporate bonds. As the chart to the right, which shows the bond yield for Moody’s Seasoned Aaa Corporate Bonds, points out, bond rates have been slipping generally downward for the last 35 years. And since the market crash of ‘08-’09, interest rates have dropped to never-before-seen lows.

John Hancock, the insurer of the federal government’s employee long-term care program, raised premiums dramatically after interest rates that were expected to rise after securing the government contract in 2009 instead dropped by about 33% (2).

Current assumption universal life insurance carriers profit from what is called the interest rate spread. They invest at 6%, credit the policy 4% and keep 2% as “profit.” One carrier, among the first to raise COI rates, was contractually obligated to credit their policies 5.5%, even while their investment earnings were less than 5%. No profit there.

Most LTC and life insurance policies experiencing the cost increase are older policies written in the ‘high’ interest years of the ‘80s and ‘90s, another characteristic these policy increases share. They both impact older aged policy holders who have paid premiums for 20 or 30 years. Many retirees, who have reduced income due to low interest rates in conservative investments, now face higher costs driven by those same low interest rates. And for most older life and LTC policy holders, there is no alternative. They are typically too old or unhealthy to obtain more economical coverage.

Another similarity is that carriers are providing both life and LTC policyholders, as a principal option, the ability to maintain the same premium cost by lowering the benefit that would be paid, reducing carrier liability while still retaining their cash flow. In every life insurance COI increase notice we have received, reduction of death benefit to retain current carrying cost is proposed as a policyholder choice. And LTC carriers are leading with the same benefit-reduction option.

Many policyholders—both LTC and life—are simply abandoning their policies after years of premium payments, potentially risking their retirement security. A recent article in the Wall Street Journal lamented the fact that use of private retirement insurance products is dropping, with the burden being shifted to public plans (3). The needs of a widow whose husband dies without life insurance or a couple incurring large LTC bills without resources will shift to and drain the public system going forward.

As the article pointed out, “retirement security isn’t just about having a nest egg, but…also about having options for turning that saving into security.” For some who have seen the costs of their life insurance and LTC policies rise, some of their retirement security may be slipping away.

While we focus on life insurance, the ITM TwentyFirst University is offering a session on long-term care insurance with expert Kim Natovitz on Tuesday, April 24 at 2 p.m. Eastern Time. The session provides one hour of free continuing education for Certified Financial Planners and Certified Trust and Financial Advisors. To sign up, click here.

 

  1. “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice.” Leslie Scism, Wall Street Journal, January 17, 2017.
  2. “Another Big Long-Term Care Insurance Premium Hike.” Howard Gleckman, Forbes Magazine, August 1, 2016.
  3. “Retirement Insurance Products Are Disappearing. And That’s Dangerous.” Benjamin Harris, Wall Street Journal, April 13, 2018.

 

3 Reasons to Move Your ILITs to Life Insurance Trust Company

Recently we posted a blog listing the top three reasons to outsource your life insurance trust administration. All three reasons made sense, but for some TOLI trustees, the most logical tactic may be to simply divest of this asset.

Let’s face it – the TOLI market is not growing; in fact, it is stagnant. Some experts estimate your prospects number only one in every 1,000 estates (1), and the prospect pool is shrinking. Also, the liability for this asset is increasing – litigation is up, and policy management is increasingly difficult.

And because of the changing estate tax situation, you will see an increasing number of clients asking you what to do with their policies – hence, a heavier workload for you.

Until now, the alternatives have not been attractive, but with the introduction of Life Insurance Trust Company you now have a viable option. Here are three good reasons to consider Life Insurance Trust Company:

  1. Rid yourself of the asset, not the client. For many TOLI trustees, the administration of the ILIT is a grudging accommodation to valued, high-net-worth clients. You were forced to keep the ILIT in-house to keep the client – but no more. With Life Insurance Trust Company, you can push the burden of the ILIT to us and keep your relationship with your client. We will partner with you to make sure that the transition is smooth, and the service levels are kept to your high standards – we are the experts in this asset class. And we will provide your financial advisors with the reports needed to keep them abreast of the asset. For those of you with “stand-alone” ILITs who would like to purge those from your portfolio, we can accommodate you – for all or a select few.
  2. We do not compete. Until now your alternatives for successor trustee were your competitors. Not any more – we are your partner. Our goal is to be the preeminent trustee in just one asset class – life insurance.  We do not have eyes for your clients’ other assets – those remain yours alone to manage. And by moving your ILITs to us, you will free up additional resources that can be directed to other, more profitable asset classes.
  3. We do the heavy lifting, you get the benefit – the asset to manage. While we will take over the management responsibilities of the life insurance trust, because you will still retain the relationship with the clients (and beneficiaries), you can be rewarded when the tax-free policy proceeds are eventually paid.  Your relationship with us will create the perfect win/win scenario, alleviating the burden while maximizing the benefit to you.

In today’s competitive and rapidly changing trust marketplace, there are few ideas that make a real difference. This may be one of them.

Find out how easy it can be by contacting Leon Wessels at 605.574.1703 or lwessels@lifeinsurancetrustco.com.

 

  1. Center on Budget and Policy Priorities, https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

3 Reasons to Outsource Your TOLI Trusts

Currently in the trust-owned life insurance (TOLI) world, we have sailed into a perfect storm of issues that make outsourcing your TOLI trusts more compelling than ever. There are plenty of articles on the varied reasons for outsourcing. And all, or at least the majority, of them are valid. Here are three stand-out reasons to outsource:

  1. The TOLI market is not growing, so why allocate resources? While life insurance trusts can serve many purposes, most trusts were set up to pay federal estate taxes. In 2017, it was estimated that only two in every 1,000 estates would be affected by federal estate taxes, and that was before the Tax Cuts and Jobs Act more than doubled the estate tax exemption.  Now, only one in every 1,000 estates will be affected (1). Your prospect pool has shrunk dramatically, so why designate capital, human or otherwise, to a business line that is, at best, stagnant? By outsourcing, you can free up internal resources for other, much more profitable, services.
  2. Your liability and workload will increase. Take it from someone who manages thousands of policies – they are getting harder to handle. A decade of historically low interest rates, a volatile equity market and a barrage of increasingly sophisticated products have combined to make the task of maximizing the value of a policy harder than ever. Because of the changes in estate tax laws, the number of grantors that will be asking you what they should do with their policies will be increasing – dramatically. And your fiduciary duty will still be to maximize the asset for the beneficiary. Will you want to spend the time to analyze all the options? Will you even know how? By outscoring to experts, this will no longer be an issue for you.
  3. You will know your costs and even lower your costs. Most trustees handling life insurance trusts are unaware of all of the expenses incurred. By outsourcing the servicing of this asset, you will be able to quantify your costs. And in most instances, the cost of outsourcing is less than keeping the task in-house. The economy of scale of managing thousands of trusts brings the cost per trust down to an affordable figure, one of the great advantages an outsource firm has, especially dealing with a cumbersome asset like life insurance. Knowing your exact costs, and potentially lowering them, may be the most persuasive reason to outsource in this competitive world.

Those firms that have made the jump to TOLI outsourcing have found the administration of their irrevocable life insurance trusts immediately less burdensome, and their level of service to clients dramatically increased. And the economics of the change made logical business sense.

For a personalized analysis, contact John Barkhurst at jbarkhurst@itm21st.com or call 319.553.6229.

  1. Center on Budget and Policy Priorities, https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

 

 

TOLI Trustees Can Learn From 401(k) Lawsuits

Those of us in the fiduciary world are aware of the rash of lawsuits targeting 401(k) plans. Fidelity, the largest retirement plan provider in the US, settled lawsuits filed by its own employees alleging that its plan choices were too costly (1). Vanguard, a firm known for its low costs, was referenced in a suit alleging that by selecting classes of mutual funds with higher costs when lower-cost funds were available, plan fiduciaries breached their duties under the Employee Retirement Income Security Act of 1974 (2).

While the virtues of each case can be debated and the final verdicts are eventually handed down by the courts, the cases themselves provide those in the trust owned life insurance (TOLI) community with guidance and insight. A few observations follow:

Times are changing. While discussing the Vanguard case, an attorney noted that a fiduciary must not “take anything for granted.” Instead, he/she must “view things new and fresh with respect to evolving fiduciary standards, and have an open mind (2).” We could not agree more. Do you think that the executives at Boeing, when they set up their 401(k) plan to benefit employees, ever thought that they would settle a multi-million-dollar case in which they admitted to violating Employee Retirement Income Security Act (ERISA) provisions (3)? Or that well-respected companies would have ever thought they would be sued for selecting their own funds in their company-sponsored plans? I doubt it. ERISA, the guidebook for 401(k) fiduciaries, is 44 years old, but it took 30 years for the first 401(k) lawsuits to trickle in. Now, it is a tidal wave. The Uniform Prudent Investor Act (UPIA), the TOLI trustee guide, is 26 years old. Will the evolution of fiduciary standards that is battering the 401(k) world hit the TOLI market? Perhaps. Will TOLI trustees be ready if it does?

The UPIA “regulates the investment responsibilities of trustees,” including TOLI trustees. It directs trustees to “invest and manage the trust assets solely in the interest of the beneficiaries,” yet too often, decisions are flavored by the whims of the grantors, to the possible detriment of the beneficiaries. The document points out the responsibility of the trustee to “monitor” and “investigate” the trust asset, yet some TOLI trustees simply do not have in-house experts who are capable of carrying out this task with life insurance. And the result could be catastrophic. In an ITM TwentyFirst University webinar just passed, we pointed out a replacement case in which a trustee was advised to replace a policy with one that had costs that were 400% higher. Clearly, that transaction, if completed, would have violated Section 7 of the UPIA that directs trustees to “only incur costs that are appropriate and reasonable in relation to the asset,” leaving the trustee open to litigation. Luckily, it was caught by our remediation team, but how many “bad transactions” are out there?

While the fiduciary climate may be evolving, some truths remain, and a recent article on designing 401(k) plans to avoid lawsuits pointed out two of them (4).

First, when there is an issue, the trustee will lose in court “when it can be shown [that] the fiduciary was unaware of the issue or otherwise didn’t look at it or understand it.” The Latin term is ignorantia juris non excusat (ignorance is no excuse). In the replacement example above, the trustee could have been held liable for the improper transaction because he/she did not know how to analyze the policies involved. The OCC Handbook on Unique and Hard-to-Value Assets points out that a “fiduciary must understand each life insurance policy that the trust accepts or purchases, or…employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company to prudently manage these assets.”

Second, the article points out issues, such as higher costs are not always necessarily bad, if they can be justified. With life insurance, for example, death benefit guarantees may make a policy costlier, but the higher costs may be justified based on trust investment goals and risk tolerance. But higher fees become “legally problematic” if the fiduciary “isn’t able to demonstrate it engaged in a prudent decision-making process” to show why the higher costs were justified. As emphasized in the article, “prudence — and the documentation of it — is the key ingredient” for trustees and fiduciaries who must demonstrate that they have made a proper decision about an asset.

To successfully manage life insurance in a TOLI setting, you must understand the asset, and then develop and document a prudent process for the decisions that are made regarding the policy. If not, you will open yourself up to liability.

 

  1. Fidelity Settles Lawsuits Over Its Own 401(k) Plan, Melanie Hicken, CNN Money, August 18, 2014
  2. New 401k Suit Targets Vanguard Fund Fees, Greg Iacurci, investmentnews.com, January 5, 2018
  3. Boeing Settles “Spano” Fee Case, John Manganaro, planadvisor.com, August 27, 2015
  4. How to Design a 401(k) That’s Lawsuit-Proof, Greg Iacurci, investmentnews.com, March 19, 2018

 

How About Just Doing the Right Thing?

During an ITM TwentyFirst University webinar on trustee liability, I described a replacement case that came into our remediation department. A grantor with a whole life contract in his trust had decided to stop gifting. His agent advised him to complete a 1035 exchange of the cash value from the existing policy into a new current assumption policy. The exchange, with no other premium, would carry the new policy out past life expectancy on a non-guaranteed basis but not to policy maturity. The death benefit in the trust would be lowered, but the grantor was comfortable with this, as the focus was on limiting the costs associated with the trust. Our remediation team notified the trustee that the death benefit in the existing policy could be guaranteed to maturity by requesting a reduced paid-up policy with the existing carrier, which would contractually guarantee the existing policy’s death benefit with no additional premium. The death benefit would be lowered but would still provide $900,000 more in death benefit than the new non-guaranteed policy was proposing.

I was reminded of the case while reading an article in the Wall Street Journal explaining that the Fifth Circuit Court had “struck down” the Labor Department’s fiduciary rule, stating that the department “overreached” by requiring those who handle retirement accounts to act in the “clients’ best interest” and asserting that the “rule is unreasonable” (1). I understand the industry fight against this law. They are afraid that it will mire them in lawsuits and make the sale of some products much harder in the retirement plan community. The law as it stands only affects retirement accounts, but states are pushing to have “best interests” laws apply to non-qualified annuities and even life insurance (2), which would certainly increase the number of lawsuits.

What ever happened to just doing the right thing? In the case above, had the trustee allowed the replacement, the agent would have made approximately $20 thousand, depending on his brokerage arrangement, but the grantor’s beneficiaries would have lost almost a million dollars. Believe me, many trustees without specialized skills are allowing these cases to slip through.

At ITM TwentyFirst, we service trustees bound by fiduciary duty, and our new affiliated company, Life Insurance Trust Company, is bound by that same duty to maximize the benefit in the trust for the beneficiaries, but that duty does not extend to most of those selling life insurance products. This has created a conflict in the marketplace that trust owned life insurance (TOLI) trustees must recognize. Tomorrow, Tuesday, March 20, at 2PM, we are sponsoring a free webinar providing CE for CFP and CTFA designates that addresses the prudent purchase of life insurance. Click here to register, and if you cannot attend, stop back by our website for a replay at a later date.

 

1.) Fiduciary Rule Dealt Blow by Circuit Court Ruling, Lisa Beilfus, Wall Street Journal, March 15, 2018
2.) N.Y. Urges Life Insurance Fiduciary Standard in NAIC Rule, John Hilton, insurancenewnet.com, January 25, 2018

 

 

NCOIL Tables Model Legislation Efforts to Deal with Cost of Insurance Increases in Life Insurance

NCOIL, the National Council of Insurance Legislators, met in Atlanta last weekend to discuss, among other things, “legislative solutions to unjustified premium increases (1).”

NCOIL is an organization made up of state legislators interested in insurance and financial matters, many of whom serve on related committees in their home states. The goal of the organization is to inform state legislators by creating a venue for interaction and education across state lines. The organization meets three times a year in open sessions that allow the legislators to hear from consumers, industry executives, and regulators.

The organization develops model laws that can be adopted on a state-by-state basis, and part of its published goal is to “preserve the state jurisdiction over insurance” and “speak out on Congressional initiatives that attempt to encroach upon state primacy in overseeing insurance.” The organization provides a needed open setting for the interaction of ideas designed to “improve the quality of insurance regulation (2).”

In its November 2017 meeting, Assemblymember Pamela Hunter of New York, brought up Insurance Regulation 210, a New York regulation we wrote about back in September of 2017. The regulation requires carriers raising expenses or cost of insurance in life and annuity policies to notify the New York State Department of Financial Services at least 120 days prior to “an adverse change in non-guaranteed elements” and to notify consumers within 60 days (3).   The leadership of NCOIL decided to continue the conversation Hunter started at their spring meeting, and on March 3rd, the Life Insurance & Financial Planning Committee of NCOIL met.

Winter storm Riley kept Ms. Hunter from attending the session, which was chaired by Representative Deborah Ferguson, who serves on the House Insurance and Commerce Committee in her home state of Arkansas.

The session opened with a statement by Darwin Bayston of The Life Settlement Association who pointed out there are 142 million life insurance policies in force with $12.3 trillion of death benefit, and stated that the current cost of insurance increases are harming many consumers. Darwin focused on the older population of insureds who had paid premiums for many years only to find that cost increases now made their policies unaffordable.

In my testimony I went over two of the many cases that we have reviewed for trustees at ITM TwentyFirst, where well over $400 million of trust owned life insurance (TOLI) death benefit administered on our Managed Service platform has been affected by the cost increases. I highlighted the problem of trustees, who have a fiduciary responsibility to maximize the asset in the trust, being forced to make decisions that deliver much less benefit to the trust than was expected. I also reviewed the many comments I had received from the public, including advisors who expressed dismay that their clients were subject to cost increases of 150 to 200 percent and consumers who cancelled policies because of COI increases and felt they had been “scammed” – their words, not mine.

Steven Sklaver, an attorney at Susman Godfrey LLP spoke next. Sklaver currently has multiple cases filed against carriers who have raised COI on policies and was “handcuffed” in his presentation as a result. However, he did contrast what is occurring in New York state versus the rest of the country, because of the New York regulation, by calling attention to a situation where a carrier who raised rates elsewhere decided not to raise rates in New York. In his testimony, he questioned whether the carriers could be raising rates across an entire class, as required, if NY state insureds were left out. He also pointed out an issue we have seen at ITM TwentyFirst – carriers not providing in force illustrations on policies in the grace period, a major burden for those of us attempting to help policyholders manage a distressed policy.

Kate Kiernan, Vice President, Chief Counsel and Deputy at the American Council of Life Insurers, spoke for the council, expressing their belief that there was no need for any new regulations concerning cost of insurance increases, either in New York or any other states.

Members of the committee had several inquiries. Representative George Keiser from North Dakota asked Mr. Sklaver several pointed questions, and disputed Steven’s assertion that the carriers were not raising rates across an entire class as required, if New York were left out of the increases.

The chairwoman, Representative Deborah Ferguson, asked me if there was anything in a sales illustration that might alert a consumer to a cost of insurance increase in the future. I informed her that the illustration is not the contract, and in fact, a poor tool to explain the policy. Though the illustration has language that indicates all assumptions could change, there is nothing in the illustration that can predict future changes in the policy.

Senator Bob Hackett from Ohio, a veteran of the financial services industry, opined that cost of insurance increases center more around tracking the policy with in force ledgers than the sales illustration, noting that he reviews the in force ledgers with his clients.  I agreed, but explained that though the cost of insurance in a policy will increase as we age, the cost of insurance increases that were the topic of discussion were beyond the natural rise, and resulted in carrying costs on policies to double or even triple overnight.

Our session, the first of the day, was brought to a halt by the vice chairman, Representative Joe Hoppe of Minnesota, who stated that he thought they should wait to see how it would “play out” in the court system before making the decision to move ahead. With a tap of the gavel, Ms. Ferguson brought the meeting to an end with the committee agreeing to not move forward to develop a model act – at least not now.

We have written often in the past about the cost of insurance increases we have seen in life insurance, including at least one article outlining some possible causes. Over the next year or so as the courts work through the various cases brought against the carriers and market interest rates adjust from the abnormally low rates of the last decade, the story will evolve. We will continue to follow up.

 

  1. NCOIL to Discuss Problems Facing Life Insurance Premium Increases, NCOIL News Release, January 23, 2018
  2. NCOIL website, http://ncoil.org/history-purpose/
  3. NY State Department of Financial Services, 11 NYCRR 48, (Insurance Regulation 210)

The ITM TwentyFirst Solution for Lost Insurance and Pension Benefits

60 Minutes, the CBS news magazine, looked at the problem of unclaimed life insurance benefits in 2016. Lesley Stahl interviewed Jeff Atwater, Chief Financial Officer of Florida who had worked with many of the top companies to get benefits paid to policyholders that had died as far back as the 1960s. Who were the carriers? According to Mr. Atwater, “all the large brand names that you are familiar with.” The carriers, to their credit, “sat down with us and made right,” according to Mr. Atwater. But, 60 Minutes pointed out instances where it was clear the carriers were at fault. After all, this is 60 Minutes. It has been said that if you are a company or an industry, you do not want to be mentioned on 60 Minutes, and this mention gave the industry a black eye. After the show aired, states began to ramp up regulatory activity.

This is not a new issue. Carriers lose touch with their policyholders. In 2000, John Hancock demutualized, sending information packages to millions of policyholders. Four hundred thousand were sent back undeliverable. It has been reported that Prudential lost contact with 2.7 million policyholders at one point (1).

Currently, the problem is also creating negative financial consequences for institutions who deal with pension benefits. In December, the Wall Street Journal reported one company had “failed to pay monthly pension benefits to possibly tens of thousands of workers in accounts that it has on its books,” requiring them to strengthen reserves, which may negatively affect their “results of operations.” A company executive said that the people owed the money were beneficiaries that the company “sought to locate over time unsuccessfully” (2). The company, MetLife, Inc. saw its stock drop nearly 9% and has lost approximately $8.5 billion in market cap (3).

The good news is there is an economical answer for companies like MetLife. In July of 2017, ITM TwentyFirst merged with Pension Benefit Information (PBI), bringing the pre-eminent location and death audit firm in the country under the ITM TwentyFirst umbrella and widening the increasing services we offer to clients and prospects alike. PBI provides proactive solutions for those financial institutions struggling with these issues.

It does not look like this problem will disappear. According to an article published just this week, MetLife’s CEO, when discussing the missing pensioner issue, said, “It’s hard for me to know, really, what happens in the other companies in our industry, but I can’t believe we’re the only one.” He went on to say, “It is an area where I think the entire industry has to find ways to do a better job and find these people and pay benefits to these people that they are owed” (5).

For those companies looking for a solution to this problem, PBI is there to help. For more information on Pension Benefit Information (PBI) you can visit their website at http://www.pbinfo.com/.

 

1. The Insurance Forum, Joseph Belth, November 2010
2. MetLife Discloses Failure to Pay Thousands of Workers’ Pensions, Leslie Scism, The Wall Street Journal, 12/15/2017
3. MetLife Shares Tumble on Pension Shortfall News, Joann S. Lubin and Leslie Scism, The Wall Street Journal, 1/30/2018
4. MetLife Hires Investigators in Search for Missing Pensioners, Alistair Gray, Financial Times, 2/13/2018
5. MetLife CEO on Missing Annuitants: “I Can’t Believe We’re the Only One”, Marie Suszynski, AM Best, 2/16/2018