Equity Index Universal Life Illustration Projections to (Thankfully) Get Another Look by Regulators

We have written as recently as November of last year about the issues trust-owned life insurance (TOLI) trustees encounter when dealing with policy illustration projections. If you are a fiduciary managing a policy, a sales or an in-force life insurance ledger may be one of the only tools you have to predict the outcome of a policy under your care.

However, life insurance illustrations are simply hypothetical projections – at best, just a guide. Too often, they are a sales tool, and the person purchasing the policy (you, if you are the trustee) often assumes they can reasonably expect that the outcome projected for the policy will occur.  This is rarely the case for many reasons, chief among them being overly optimistic rate of return projections and non-guaranteed interest rate bonuses and multipliers that are not readily seen in an illustration.

This has been a significant concern for us with equity index universal life policies that we have been tasked to review and then help manage for trustees. These policies have become popular as a ”more conservative” alternative to variable universal life policies because though they track an index (the S&P 500, for example), they have a limit to the downside that “eliminates losses.” Many variable universal life (VUL) policies assumed cash value rates of return of up to 12% annually, and when we first began seeing these EIUL policies (often as a replacement for a VUL policy), the crediting rates in the projected policy crediting rates shown in sales illustrations approached 8%, which the salesperson told the grantor was a reasonable assumption. We disagreed and have pointed out one carrier who actually sells the product has an online “translator” that shows that in order to obtain an 8% crediting rate for the policy, under most common policy parameters (10% cap, 0% floor), the index tracked would have to exceed a 12% return. The regulators also disagreed, and in September of 2015, the National Association of Insurance Commissioners (NAIC) placed limitations on the crediting rate that could be shown on both sales and in-force ledgers to approximately 7%.

The limitations placed by the NAIC dampened EIUL sales since the policies could not illustrate as well. It was not long until carriers figured out how to game the system by adding interest bonuses and multipliers that were barely decipherable in an illustration. The ploy worked, and sales rebounded, but now the NAIC is going to take another look and has created a subgroup to review the regulations, which according to one article on the matter, “enabled some insurers to show double-digit returns that many considered unrealistic.” (1) We applaud the second look and hope the outcome will generate a more reasonable methodology for EIUL illustrations.

One of the most significant risks to a TOLI trustee is accepting a policy that has little hope for success. Many EIUL policies purchased in the last few years will fail. How many are in your portfolio?     

  1. NAIC To Reopen IUL Illustrations Guideline, John Hilton, January 11, 2019, insurancenewsnet.com

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.

A Decade of TOLI: The Changes and Challenges

In our last Blog post, we recapped the year in Trust Owned Life Insurance (TOLI) for 2015 (see: The Year in TOLI – 2015 Edition). As one of the pioneers of life insurance policy management in the United States, ITM TwentyFirst has the unique ability to participate in and track trends in the TOLI industry. Almost a decade ago, we surveyed our TOLI portfolio. In 2015, we updated that survey and the results clearly reveal changes – many of which will lead to additional challenges for those of us whMike_Blog_charts-1o manage life insurance policies.

The population in our TOLI portfolio is aging. As you can see in the chart to the right, a decade ago the greatest number of insureds were in the 40-to-59 age group, which has experienced the biggest drop in the last decade. As that group’s members age, younger people are not replacing them. This is probably because the changes in estate tax laws have made it less compelling for younger individuals to place life insurance in a trust. Many of the policies in force a decade ago were placed by grantors when the federal estate tax kicked in for individuals at $1M or less. Today, estate taxes begin at $5.45M, and the need for life insurance to pay estate taxes has decreased.

Though those in the accumulation phase may not be using Irrevocable Life Insurance Trusts (ILITs) as often as their elders, this does not mean that those in the preservation phase are clamoring to drop their life insurance. The greatest jump in age groups in the last decade was the 80 – 90 and 90-plus groups. The combination of these groups makes up almost 25% of our portfolio. Like society in general, our TOLI population is aging, and this causes certain issues. Life insurance costs generally increase with age, and this increase often creates tough decisions when dealing with policies, especially those that might be underfunded. Health deterioration combined with policy failure makes policy management choices harder. Using a Life Expectancy (LE) Report as another data point when making these policy decisions will become a vital management tool as we move forward. Obtaining an LE Report may prove you took the steps to make a prudent decision even when the decision turns out to be “wrong” (see: How Using a Life Expectancy Report to Manage a Life Insurance Policy Helped Save Our Trustee.)

While life insurance policy types have not changed much over the last decade, the specific types that life insurance advisors favor have changed. Mike_Blog_charts-2When we conducted the initial ITM TwentyFirst survey almost a decade ago, the predominant policy type held in trust was Whole Life. The combination of base and blended Whole Life made up just over 40% of our portfolio. Today, that combination has dropped to just over 30%. Whole Life typically has significant cash value build-up, but some advisors think it is too expensive. After all, unless necessary for specific trust goals, the cash value in the policy is an unneeded (and perhaps costly) asset of the trust. The key to maximizing the beneficiary benefit is creating the highest internal rate-of-return on the death benefit paid on the policy, which comes from minimizing premium payments.

Term policy usage has dropped slightly, from just under 17% to just under 13% today. Most Term policies held in trusts are used for short-term needs and are either converted to permanent polices or dropped after the short-term need for the coverage is gone.

Universal Life (UL) has surged almost 50% from just under 30% of the portfolio to almost 44% today. Guaranteed death benefit UL products now make up a higher percentage of the portfolio than they did a decade ago. These come with required premiums that must be paid in full and on time which creates a tracking and administration challenge for trustees – one that comes with liability. Equity-indexed products, some with unreasonable investment expectations (see: Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies), have increased in popularity. Variable Life has seen a slight decrease in usage. Variable Life is the only policy type that requires the policy owner to make the cash value investment selection and happens to be the only policy type that can experience a cash value investment loss. The volatility in the equity markets we are experiencing lately accentuates the special care required, care some trustees cannot provide. Today we are seeing Current Assumption Universal Life (CAUL) policies, which have been the backbone of the industry, subject to cost-of-insurance increases that threaten policy health. These cost increases, unheard of only a few years ago, have increased the premium needs on some policies by 200% or more (see: Transamerica Cost Increase Causes Premium to Maturity to Jump Over 200%: A Case Study for TOLI Trustees). Challenges abound from all of these various UL products.

Those CAUL cost increases are in part due to the historically low interest rates being paid on fixed investments, which have put pressure on life insurance carriers. A CAUL policy has a current rate being credited, a minimum rate that is guaranteed, and a projected rate at issue. It is no surprise that these rates have droppeMike_Blog_charts-3d over the last decade.

As can be seen in the chart to the right, ten years ago the average interest rate credited at policy issue was 6.19%. Today it is less than 5%. The average rate being credited currently has dropped also, by almost a full percentage point. The average guaranteed rate has dropped about .5%, and many policies currently marketed today have guaranteed rates of only 2%. Times have changed – and for those insurance products relying on fixed investments – not for the better.

As life insurance trusts age, the issues around them tend to increase. As we mentioned, over the last decade dividends and crediting rates have dropped, and the older policies tend to be more negatively affected. In addition, as trust goals change over time, policies may need to be adjusted. In short, as your portfolio ages, your risks and work will tend to increase. In the current survey, 30% of the policies were over 20 years old, and 10% were over 30 years old. Ten years ago, the number of policies with a duration above 20 years was significantly less – trustee risk has increased.

One bit of good news that we found in the newest survey was the increase in highly rated policies. ITM TwentyFirst uses a proprietary Mike_Blog_charts-4rating system that measures risk to the trustee. The current 55% of “A” rated policies represents low-risk policies expected to run to contractual maturity and pay full death benefits. This percentage has grown by almost 30% over the last ten years and represents the hard work of our clients in managing their policies. “D-“ and “F” rated policies, representing the greatest risk to the trustee because they are projected to lapse prior to maturity or life expectancy, dropped dramatically and represents less than 20% of the portfolio. While these policies represent risk to the trustee, that risk can be mitigated through remediation and documentation efforts of the trustee. For our Managed Solution clients, remediation and documentation services are included as part of the offering. A “U” designation represents unrated policies, typically group policies with limited information or policies we are in the process of rating.

Challenges for TOLI Trustees have changed over the last decade as insureds aged, products changed and interest rates have fallen. However, insurance remains a critical component of many estate plans and we’ve seen the value insurance plays in the life of beneficiaries. So the key is for TOLI trustees to make sure they are prudently managing the policies for the beneficiaries. Although life insurance is a peculiar financial instrument and the decisions that must be made around policy management are rarely black or white, having the appropriate processes, procedures, policy information, policy reviews and remediation expertise can really help trustees mitigate liability and deliver results for the client.

The Year in TOLI – 2015 Edition

One of the highlights for us here at ITM TwentyFirst was the June 1 merger of Insurance IQ, Insurance Trust Monitor (ITM), and TwentyFirst (See Merger of Leading Life Insurance Service Firms) to create ITM TwentyFirst. Synergy is a term thrown around easily when firms join forces, but in this case, it is true. The three firms have blended seamlessly to create the nation’s pre-eminent life insurance policy management firm.

One of the initial benefits of the merger was the introduction of ITM University, a web-based educational series providing free CE for CFP® and CTFA designations. The sessions focus on managing TOLI trusts and other hard-to-value assets, as well as other important topics like the looming Department of Labor (DOL) Fiduciary Regulations. See https://www.itm21st.com/Education for a listing of our first sessions for 2016.

In the Trust Owned Life Insurance (TOLI) world, 2015 saw a slight increase in institutional pricing for TOLI services. We have heard anecdotally of some large payouts for TOLI policy mismanagement (none of our clients). It appears trustees are finally just beginning to truly understand the liability of this asset class and to price their services to reflect that.

The successor trustee business saw an uptick in 2015. Trustees are realizing that if they cannot manage this asset profitably while also mitigating liability, it might be better to offload the asset to someone who can. We know trustees that will accept these TOLI trusts, and their business is booming.

We spoke earlier in the year about the problem trustees have when managing policies that do not live up to sales illustration expectations. See Life Insurance Illustration Assumptions…a Trustee’s Dilemma. The life insurance industry has often provided what turned out to be overly optimistic sales illustrations since they tend to drive policy premium costs lower, making the sale a bit easier. This year, the National Association of Insurance Commissioners (NAIC) took a look at the sales practices being used to sell the industry’s hottest product, Indexed Universal Life (IUL), and decided that the hypothetical rates shown in these illustrations were, in fact, overly optimistic. In September, the NAIC published a new regulation that limits the maximum crediting rate that can be shown on both sales and in-force ledgers for IUL policies to approximately 7%, with slight carrier and product variation based on the specific methodology used. See Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies.

Managing a life insurance policy has not gotten easier, for sure, unless your name is Max-Hervé George (See The Best Life Insurance Policy Ever . . . Unless Your Name is Aviva), who could be a billionaire by his 30th birthday because of an odd fixed-price arbitrage life insurance contract that allows him to place his investment bets in the policy cash value while essentially knowing the outcome. His good fortune is Aviva’s problem, and litigation surrounding the policy contract continues.

For the rest of us managing this asset, it is definitely harder. The low interest rate environment, even with the Fed’s bump a week or so ago, is going to be with us a while. The effect of the low interest rates on policies, especially Current Assumption Universal Life (CAUL) policies, has been dramatic, with the cost of insurance (COI) in some policies rising, something that was unheard of just a few years ago. We first sounded the alarm on the COI increase in an August blog when we cited an email from back in 2013 that warned us they might be coming. In that blog entry (See Notice to TOLI Trustees: Universal Life Costs ARE on the Rise), we referenced the Legal & General and Transamerica COI increases. Those increases were quickly followed by COI increases from Voya and AXA. We showed the effect of these increases in detail for both Transamerica (See Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees and AXA’s Athena II (See Taking a Look Under the Hood of the AXA Athena II Universal Life Cost of Insurance Increase) policies.

As the year came to a close, we wrote about another unprecedented occurrence, the decision of Transamerica to no longer run in-force ledgers based on current assumptions for a specific group of Universal Life policies. According to the carrier, they will only illustrate “the guaranteed future interest rate and monthly deductions” on that group of in-force policies. See Transamerica Now Making It Almost Impossible to Manage Their Life Insurance Policies. This decision makes it virtually impossible to understand the actual policy performance on those products.

The year ended with a December 21st class action filing against John Hancock Life Insurance Company (U.S.A.) for allegedly forcing policyholders to pay “unlawful and excessive cost of insurance (COI) charges,” as well as “unlawful and excessive premiums.” See John Hancock Hit with Class Action Lawsuit Over Cost of Insurance In Some Universal Life Policies.

To say the landscape changed a bit this year for those of us managing life insurance policies would be an understatement. For trustees, the challenge has grown much larger, and over the next few years, I believe that those without the requisite knowledge to manage this cumbersome asset will have to reassess their TOLI business.

Each year, carriers spend millions of dollars promoting the sale of new life insurance policies, with few companies focused on maximizing the over $11 trillion of life insurance already in force. We at ITM TwentyFirst have always believed that that our job is to provide unbiased life insurance expertise to protect life insurance policy owners by helping them make informed decisions. We appreciate the trust and faith our clients have placed in us and look forward to 2016. Though there are challenges, we are excited about the additional resources we now have to manage life insurance and look ahead to the year with great anticipation.

Happy New Year from all of us at ITM TwentyFirst!

Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies

We have written, as recently as June of this year, in Life Insurance Illustration Assumptions…a Trustee’s Dilemma, about the investment assumptions used in life insurance sales illustrations. In most illustrations, all else equal, the higher the return assumed in the investment backing the cash value, the lower the premium shown to carry the policy. Historically, this has led to aggressive sales presentations that illustrate well, but ultimately do not hold up. In the last few years we have published a number of Blogs referencing Indexed Universal Life (IUL) policies sold with what we believed were aggressive assumptions. It appears that that will be ending. As of today, Actuarial Guideline XLIX (AG 49) will limit the crediting rate shown on all “new business and inforce life insurance policies” where “interest credits are linked to an external index or indices.”

The new regulation from the National Association of Insurance Commissioners (NAIC) was the result of their Life Actuarial (A) Task Force and came after the New York State Department of Financial Services (NYDFS) began an investigation in September of last year into industry sales practices (New York State Regulators Eying Indexed Universal Life Sales Practices – What Every Trustee Should Learn From This). Life insurance carriers lined up on opposite sides of the discussion, offering opinions based primarily on whether or not they sold the product. In general though, most carriers have reached agreement that creating a standard and uniform approach to IUL sales illustration assumptions is best for the industry and the consumer.

The new standard will limit the maximum crediting rate that can be shown on both sales and inforce ledgers to approximately 7%, with slight carrier and product variation based on specific methodology used.

In addition, the regulation limits “the illustrated rate credited to the loan balance” to an amount that “shall not exceed the illustrated loan charge by more than 100 basis points.”   This limit is in apparent response to “loan arbitrage” sales strategies that sprung up in the industry. This new limitation, along with other disclosures to be included in the illustration, such as an alternative scale rate that must be shown “with equal prominence,” and a table showing historical index performance over the last 20 years, will have an effective date of March 1, 2016.

We at ITM|TwentyFirst have long opined that sales illustrations should be conservative in nature and have in the past (What You (as Trustee) Need to Know About Equity Indexed Universal Life) suggested that when an Agent is projecting a crediting rate above 7% on a sales illustration, that you, as Trustee, “ask to see the outcome at 5% also, which might be more in line with reality.” As we mentioned in that Blog, “It is not wrong to fund a policy based on a lower return expectation, knowing that funding in later years can be decreased if a higher return is obtained.”

Life Insurance Illustration Assumptions…a Trustee’s Dilemma

In the early ‘80s when interest rates skyrocketed (Are you old enough to remember 18% mortgCaptureage rates?) the insurance industry created Universal Life insurance (UL), with sales illustrations based on “current assumptions,” which included the fixed rate being credited to the policy’s cash value at the time of the policy’s issue. As with all sales illustrations, the historically high “current” assumptions were projected over the life of the insured, creating a rosy scenario that was easy to sell. The higher the interest rate credited, the lower the premium needed to sustain the policy. Unfortunately, as can be seen by the chart to the right, which shows the actual crediting rate of a top UL carrier, those rates did not hold. The rosy scenario promised turned into a thorny reality as policy cash values plummeted and policies lapsed. In the mid to late ‘90s when a monkey with darts could rack up double-digit returns in the equity markets, many agents were selling Variable Life contracts tied to the equity markets with 12% annual return assumptions. How did that work out? Same outcome: crashing cash values and lapsing policies. Even venerable old Whole Life has seen a steady downturn in dividend rates over the last twenty years, with forecasted “vanishing premium” scenarios that led to vanishing policies and lawsuits. Point being, a sales illustration is just a projection, and your job as a trustee is to determine whether that projection will come true.

This brings us to the industry’s current hot product, Indexed Universal Life (IUL), which accounted for half of all UL sales in the first quarter of 2015. In a past blog post, “What You (as Trustee) Need to Know about Equity Indexed Universal Life,” I wrote about this product. Briefly, its cash value is driven by the returns in an index, typically the S&P 500, but the reason it is touted as “conservative” by sales agents is that it has a floor in the returns, typically 0%, so it “cannot lose money,” like a Variable policy. That is true, but for a Trust Owned Life Insurance (TOLI) trustee, the real question, as with the preceding policy types, is: will the premium and the rate of return actually earned on the cash value allow this policy to run to maturity or at least to life expectancy? We at ITM|21st have seen hypothetical illustrated returns of 8% and up used on sales illustrations, which we believe are unreasonable. A past blog entry, “Illustrating Equity Index Universal Life Policies,” spoke to the issue and highlighted a carrier-created website where you can input the hypothetical long-term equity return, and the website will translate that to the actual credited rate you will receive in a policy. Assuming the typical 100% participation rate, 10% cap, and 0% floor, a 12% return in the index used would equate a 6.75% crediting rate applied to the policy. Granted, the carrier points out that this is but “one approach” to determining an outcome and not a “predictor,” but it provides us with some guidance to develop more realistic illustration assumptions.

Unfortunately, there are some in the industry who do not sell these policies with realistic assumptions, so the National Association of Insurance Commissioners (NAIC) is readying new rules that appear to limit the hypothetical returns shown in IUL sales illustrations to the 6% to 7% range. These new rules are expected to be phased in September 1, and we will be following up with information at that time. Until then, if you are a trustee, we still suggest: if you are taking in an IUL policy with a crediting assumption of 7% or higher, get a second illustration with an outcome of 5% as the basis for policy funding. If by chance the policy is actually credited with a 7% return over time, your client can possibly lower the premiums in later years. It is better to have a client with expectations that can be exceeded than a client whose expectations will undoubtedly be dashed.

2014 – A TOLI Update for Trustees

As we end 2014 I wanted to post some observations from the past year.


The TOLI business is not growing, at least not significantly. We are still feeling the estate tax filing threshold jump to an indexed $5M. As the number of prospects drops, so does the number of new clients. Yes, there are reasons other than estate taxes to hold a policy in a trust, but the estate tax is the main driver. Can the estate tax change to favor the use of insurance trusts again? Perhaps, but probably not in the short term.

Even though we have not seen much growth in TOLI, we have also not seen a wholesale desertion of these trusts. No rush to exit, more of a slow trot for a few, but this is creating service challenges, as well as opportunities, for the trustee.

Service Challenges: Some grantors are concluding that their TOLI policy may no longer be needed, or at least the death benefit does not need to be as high as it is. Now I know there are people who will read this who can convincingly champion the virtues and economic efficiencies of life insurance, but can we all agree that there are few people who truly enjoy paying life insurance premiums? Many of them are your clients, so you will see an increasing level of policy service responsibilities for this group. What does the trustee do when the 85 year old grantor says they no longer want to pay premium? Or a client says he no longer needs $10M of coverage, $5M will do? This is still an asset that the trustee is required to maximize for the advantage of the beneficiary. But how? This type of analysis is in the ITM wheelhouse, but I have seen trustees frozen by these service requests when they lack in-house knowledge or outsourced abilities. And as I mentioned, this type of request will not be going away, it will be increasing.

Every trustee has “disinterested” grantors, those slow pay or even no pay, unresponsive clients that take up way too much time. Well, guess what? You will have more of them. These often apathetic grantors present a particular challenge. Dealing with them efficiently will become more important as we move forward.

New Opportunities: For those of you who like to look at the bright side of the road this new estate tax reality will give you the opportunity to engage your clients in real discussions about their financial situation.   And depending on your business model, that discussion could open up additional business opportunities in investments and/or insurance and perhaps provide you with an entrée to further discussions with the next generation. After all, isn’t one reason to hold these trusts to bridge the gap to that generation? A frank discussion with both generations on subjects such as long term care, for example, might just create that bridge.

TOLI Trusts on the Move: We have seen a number of TOLI portfolios move in 2014 and we are aware of additional ongoing discussions. And it makes sense. Some trustees simply do not have the requisite skills to manage this asset, or the stomach to handle the liability which can climb into the millions. And many of these trusts are “standalone,” with relationships generating only a TOLI administrative fee, no additional investment management or other charges. For every “seller” there must be a “buyer” and in this case there are still trustees in the marketplace who are actively seeking not only new business, but blocks of existing business. We have assisted in transactions in 2014 and I am sure we will continue to in 2015.

Life Insurance Sales: While the insurance market as a whole plodded along in 2014, either up a bit or down a bit quarter over quarter, Indexed UL (IUL) “experienced the strongest growth” according to the latest report from LIMRA, a life insurance marketing organization. We certainly saw an influx of this product at ITM (see What You (as Trustee) Need to Know About Equity Indexed Universal Life for further information on the pluses and minuses of Indexed UL.) The sales practices of agents selling this product led to Regulatory Scrutiny in 2014 that I outlined in New York State Regulators Eying Indexed Universal Life Sales Practices – What Every Trustee Should Learn From This.  As I mention in that blog, there is a concern by the NY regulators that “some insurance companies may be giving buyers overly optimistic projections of the potential gains in the policies.” These policies are often used as replacements for existing Variable Life policies, touted as a “safer, more conservative” alternative. Often, when we look back in the file we see that the existing Variable policy assumed a rate of return of 10-12% in a separate account portfolio and of course the policy failed to reach expectations. Frequently we are pitched a replacement IUL policy with a rate of return of 7-8% based on an Index, typically the S&P 500. Ironically, some industry observers (and at least one carrier) have said these lofty illustrated IUL expectations will be equally hard to attain.

Policy Replacements: One area of growing concern in 2014 has been the quality of the replacement policy options forwarded to us for review. I am not sure if it is the lackluster sales in the high end market, but we saw more “bad” replacements this year than in any past year. I have always told our clients that when it comes to selection there is no “best” policy. Policy selection is determined by particular facts and circumstances. What has been troubling to see is the seemingly limited ability of agents to act as true advisors. We will receive a “recommendation” based on an “analysis” that consists solely of dumping the cash value of the existing policy into a new policy. Sometimes a simple modification of the existing policy produces far superior results, though no new sale. I will admit I may be overly harsh here as an agent is generally not a fiduciary and simply providing an “appropriate” product is a low bar than can be hurdled easily. But a trustee is a fiduciary and that task requires a bit more responsibility – and work.

Not Your Father’s Life Insurance Company: In 2014, some “stodgy” life insurance carriers were spicing up their investment portfolios to squeeze out a little more return. In a blog published in August of this year (Life Insurers Adapting Investments to the Sustained Low Interest Rate Environment), I noted an article in Reuters published this year that noted that Allianz “invested in such projects as toll roads and stadiums as well as in renewable energy initiatives, such as wind parks and solar farms,” and they plan to “shift 10 percent … of the … firm’s assets into less-traditional investments in the next three to five years.” We have also seen hedge funds and private equity firms, entities rarely seen before, enter the insurance and annuity marketplace, a trend that is sure to persist over the next few years.

Life Settlements: After a number of years of decline, the life settlement market has shown some signs of revival in 2014. An aging population is providing the inventory for life settlement sales, and the prolonged low interest rate environment is bringing investors in looking for a higher return on what is perceived as a non-correlated asset. According to a study by Conning & Co., reported in insurancenewnet.com this year, investors are seeking “alternative assets to generate comparatively higher investment returns.” Earlier this year on this blog I penned A Short Primer on Life Settlements for TOLI Trustees, which can provide you with some background on the subject. And it may be time to brush up on this strategy, as life settlements will become more important as you will be required to maximize value for the beneficiary on a policy the grantor may no longer want.


At ITM: 2014 has been a year of tremendous growth as our business model has benefited from the changes in the TOLI market. Our clients range from trustees wishing to aggressively build a TOLI business to those looking to offload their TOLI trust assets, as well as those who see TOLI as a component of a larger business model, but one that needs to be run efficiently, with liability mitigated. We continued our ITM Education Series in 2014, expanding subject matter to support our commitment to educating the trustee marketplace, not only in TOLI matters, but in other pertinent subjects, while providing free CE credits for both CFP and CTFA designations. New sessions for 2015 will be announced on our website soon. In closing, let me thank all of our clients for a wonderful year and wish everyone a warm holiday season. As we have in the past, we will be spending a week in Orlando in January at the Heckerling Institute on Estate Planning. Please do stop by our booth if you are attending.   Here is to a healthy and prosperous 2015.