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.

Lawsuit Filed Against Phoenix for 2017 Cost of Insurance (COI) Increase

On April 19th, a class action lawsuit was brought in the Southern District of New York against PHL Variable Life Insurance Company (Phoenix) for subjecting policyholders “to an unlawful and excessive cost of insurance (“COI”) increase” …“in violation of their insurance policies.” We reported on the cost increase in August of last year.

A 2010-11 COI increase resulted in a 2015 settlement against Phoenix for more than “$130 million in monetary and non-monetary benefits” and the carrier agreed not to increase the COI on those policies until after December 31, 2020.  Some of the policies affected by the 2017 increase were policies that were part of that lawsuit.

Per the current lawsuit, the 2017 increase is occurring in three stages: first, certain Accumulator (I, II, III, and IV) and Estate Legacy Universal Life universal life policies not part of the prior settlement class would have increases occur on their first anniversary date after November 2017, second, those policies part of the settlement would see increases after December 31, 2020 and third, for “other policy owners, Phoenix will impose the 2017 COI Increase on December 31, 2020 but then rebate to those policyholders the amount of the increase.” The suit contends that this last stage represents a “special side deal” with “institutional investors” that violates the “uniformity requirement” of the contract. The suit also alleges the increase discriminates “within a class of insureds based on whether they were subjected to the 2010 and 2011 increases and the terms of various side agreements reached with Phoenix.”

In 2017 we received letters from Phoenix that announced there would be an “overall increase to cost of insurance rates, as well as progressive increases…beginning when an insured reaches age 71 through age 85.”  The lawsuit claims that the increases are “unlawful” since any changes must be “on a uniform basis for all insureds in the same class.” According to the lawsuit, the policies “do not have a distinct age 71 to 85 class, nor do they have separate classes for each of age 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, and 85. The 2017 COI Increase therefore violates the contractual uniformity requirement”…since… “policyholders aged 71 and older are being targeted and treated differently than policyholders younger than 71” and “policyholders aged 72 and older are being progressively targeted each year as they age and discriminated against relative to younger policyholders.”

The lawsuit contends the “2017 COI Increase is not based on the enumerated factors” that are mandated in the policies – “mortality, persistency, investment earnings, and expenses.” For example, mortality rates, “have improved steadily each year” and “people are living longer than when the products were process and issued.” Some of the policies subject to the increase “were issued as recently as 2014,” and the suit contends that “nothing that has changed between 2014 and 2017 that would merit a new COI rate increase.” According to the filing, “the increase was not calculated through an actuarially reasonable methodology, and was designed to induce lapses, all in violation of the policies and the implied covenant of good faith and fair dealing.”

The complaint notes that the increase was not implemented in New York state “because Phoenix NY is regulated by the New York Department of Financial Services (“NYDFS”), which has recently become an active regulator in monitoring unlawful COI increases” and contends that “the only possible explanation” was that the carrier “knew that the COI increase was not legally or actuarially justifiable and that NYDFS would find it to be unlawful.” The fact that the carrier exempted New York policyholders from the increase was “another violation of the prohibition against intra-class discrimination.”

While the increase did not occur in New York, the case was filed in New York. The complaint noted that Phoenix was acquired by Nassau Re in 2016 and though it has a statutory home in Connecticut the senior management works out of New York City, the company address is listed there, and “all major decisions, including the decision to raise COI rates on the Subject Policies, are made from Nassau Re’s New York City headquarters.”

The suit asks the court to declare that the 2017 increase was “unlawful” and “constituted a material anticipatory breach of the Subject Policies.” It requests the court order Phoenix to “reinstate any lapsed or surrendered policies” and provide the plaintiffs with “compensatory damages, consequential damages, restitution, disgorgement, and any other relief permitted by law or equity.”

We will be following the court case and will report back as the proceedings unfold.

For a copy of the 28-page lawsuit, please email mbrohawn@itm21st.com

New Transamerica Cost of Insurance Increase Is One of the Largest Yet

In the summer of 2017 we posted a blog about another Transamerica cost of insurance (COI) rate increase affecting Ultra 115 and TransSurvivorship products purchased in 1998-99. We anticipated that the increases would be around 58%—a hefty raise. What we are seeing now could easily surpass that.

We are now beginning to receive notices of monthly deduction rate increases for some policies. Some of the policies are hit with a level 47% increase. Others, according to the notices will increase 39% on the next anniversary date, then in addition, the carrier anticipates increasing the COI by that same amount (39%) the next year and the year after. The increases are “compound” and over-and-above the “customary increases associated with age.” After the three-year period the increase percentage remains level.

A three-year compounded annual 39% increase is dramatic, and the carrier admits the increase “may be a significant consideration” for the policyholder, while laying out the typical policy holder options: retaining the current death benefit and paying the higher carrying cost, reducing the death benefit to lower the cost, surrendering the policy for cash value or reaching out to the carrier for other options. In the past we have found that some Transamerica UL contracts do offer a reduced paid up whole life policy for some policy holders.

Transamerica is increasing the rates based on “current expectations” about “future costs,” and though “future costs of providing coverage are subject to change over time,” they believe that “the second and third rate increases specified . . . are necessary.”

What does an increase like that look like? I asked our team in New York City to look at an illustration for one of the policies affected by the increase.

First, an explanation. Carrier COI charges are computed on a per thousand basis on the net amount at risk, defined as the difference between the death benefit and the cash value of the policy. For example, if a level death benefit policy has a benefit of $1 million and a cash value of $200,000, COI is only charged on $800,000 ($1 million minus $200,000). Why? Because if you die, you do not get the cash value—the carrier keeps it, you get the death benefit only. Therefore, their risk is the difference between the two.

Note: Some policies can be designed with an increasing, not level, death benefit, which increases the amount your heirs receive (and the cost of the policy).

Our NYC team provided a cost increase analysis for a policy in our portfolio. As expected, the cost increase in the first year was 39%, from $5.56 perCOI thousand dollars net amount at risk per month to $7.73. Assuming a policy had net amount at risk of $800,000, as above, the pre-COI increase monthly charge in the next year (year 1) would be $4,448 ($5.56 x $800,000 / 1,000). Make sense?

After the COI increase, the monthly charge would be $6,183 ($7.73 x $800,000 / 1,000), the 39% jump.

Skip down to the third year, which assumes the compounded 39% increase each year. The pre-COI monthly charge would have been $5,642, but after three years of compounded increases, the monthly deduction charge rises to $15,161, a 169% increase. In this scenario, the approximate annual carrying cost for the policy go from $67k to $182k.

From the fourth year on the percentage increase remains a level 168.72% over the previous rates. The carrying costs above are not the exact numbers that would occur—they could get worse, if the policy’s cash value drops (and the net amount at risk increases). These are some of the largest cost increases we have seen to date from any carrier.

While we hoped the COI increases would slow down or even stop with interest rates rising, this latest increase tells us that may not be the case.

Special thanks to Frank Tomasello and Mike Irey in our NYC office for their contribution to this posting.  

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