Informing Grantors About Their Policy Makes Good Business Sense

A recent online survey about life insurance found that 33% of life insurance policy owners do not understand how their policy works. (1) I suspect that this number is probably low. Maybe the other 67% probably think they know how it does, but I imagine they could get a refresher lesson on how it actually does. Even if they do understand how it works, do they understand how a decade of low-interest rates and equity market volatility affected their policy?

TOLI trustees should be contacting grantors to explain to them just how their policy works. Doing so will provide the grantor with greater clarity about their policy and provide the trustee with a chance to deepen the client relationship, bringing benefits to both grantor and trustee.

For the grantor who has been dutifully paying premiums (and trust fees) for years, the discussion will reinforce the reasons for taking the policy out. Even though the changes in the federal estate tax may have greatly reduced the number of people subject to the tax, life insurance is still a worthwhile financial investment and that point can be driven home by the discussion. Just because the proceeds will not be gobbled up by taxes does not mean the proceeds are no longer as valuable – in fact, they are now more valuable since, for many, one hundred percent of the benefit will go to the beneficiaries, a plus.

For some policies, the last ten years of low-interest rates have been a drag on performance and now is the time to review those policies with your clients – when interest rates are ticking up and fixed investments (which most life insurance policies are) have a rosier future. Perhaps the premiums will have to be increased to keep the policy on track but the policy, if managed correctly, is still a valuable asset.

Many of your grantors are reassessing their financial and estate planning future, given the changes and market volatility of the last ten years. Once they are comfortable their life insurance policy is secure and valuable, you can move on to other subjects that may provide additional revenue for your firm.

For many of your clients, retirement income is a major concern. Some may feel they do not have enough assets to support their lifestyle, some simply have not put a retirement funding plan in place. In either situation, financial planning services can lead to additional opportunities for your firm. For example, clients worried that they may “run out of money” can be introduced to annuities as a funding vehicle for a portion of their assets to ensure a basic lifetime income.

Higher net worth clients, with well-funded retirements, still need your services. Introduce your investment options as you develop a relationship with them. These clients also have issues other than money you can solve. Most wealthy individuals struggle with how much to pass on to their children and how to structure the inheritance. You can bring great relief to ILIT clients by introducing other trust and estate planning services that can solve their problems.

Use the discussions with the grantors to open a dialogue with the beneficiaries of the ILIT that you control. Most TOLI trustees we speak with rank retaining the asset – the death benefit after the death of the insured – as one reason for handling ILITs, yet few put in the time and effort to cultivate the next generation of wealth. Why can’t the beneficiaries be clients now so that retaining the TOLI benefit in the future will be cemented?

There are many reasons for contacting grantors to explain the policy. For clients of ITM TwentyFirst, you have one of the best tools in the industry available to do just that. Our annual policy reports provide all of the information needed to have a fruitful discussion with your client and for clients of our Managed Solution, a remediation specialist is available for any questions or policy modeling that might be needed.

Open the lines of communication with your grantors, you will be glad you did.

1. 54% of Americans Own a Life Insurance Policy, But One-Third Not Exactly Sure How It Works, Mike Brown, September 19, 2018 lenedu.com

Allstate Sued by Firm Alleging Non-Payment of Death Benefits

In 2013, we wrote about the sale of Lincoln Benefit Life, an Allstate company, to Resolution Life Holdings, Inc. It was the first purchase in the States for the UK company, run by British entrepreneur, Clive Chowdry, whose ambition, according to the Financial Times, was to “buy up and roll together a number of life assurance businesses and to run them for cash instead of hunting for new customers.” The runoff administration business model employed by the company and by some others who have entered the insurance field is designed to maximize profits on a closed book of business. At the time, we worried about cost of insurance increases in the block, but now comes a lawsuit accusing Resolution from failing to pay “death benefits owed” to Emergent Capital, Inc., a Boca Raton, Florida, life settlement company that owned the policies in question.  Although the lawsuit references only three policies directly, it notes that Emergent is owner of over 50 Lincoln Benefit Life policies.

Allstate is alleged in the lawsuit to have pursued the sale to Resolution without proper vetting and without the “good faith” that it owed Lincoln Benefit policyholders. The suit claims Allstate had a “fiduciary” duty to act in the“best interests” of policyholders, “use diligence and care in the investigation and evaluation of Resolution as a prospective purchaser,” and “refrain from acting solely on the basis of its own financial interests in the sale.” The complaint asserts that by “choosing to sell its wholly-owned subsidiary Lincoln Benefit to the highest bidder, Allstate improperly placed its own financial interests ahead of those of the insurance policy owners” and “ignored information readily available to it regarding Resolution’s well known claim practices that violate statutory and common law rules.” The suit claims that it was “understood in the life insurance industry that, at the time of the Lincoln Benefit sale to Resolution, Resolution may have had an internal practice and procedure of challenging and contesting every life insurance policy claim involving policies having life benefits that exceeded a certain high-level dollar amount.”

The three policies referenced in the lawsuit were issued in 2007 to trusts created by the insured, and shortly after policy issue, all three trusts “entered into a premium financing arrangement with Emergent,” apparently with the policies as collateral. Within approximately three years of policy issue, all three policies had their ownership changed to Emergent. Lincoln Benefit was alerted via “fully completed and fully executed” Lincoln Benefit service forms that policy ownership was changed with “the specific knowledge and consent of Allstate’s wholly-owned subsidiary, Lincoln Benefit.” After the change in ownership, both Lincoln Benefit and then Resolution accepted premium payments from Emergent.

According to the suit, Allstate “created and maintained an internal committee to research, vet, and approve qualified and reputable insurance premium financing companies, like Emergent, with whom it would do business and recommend to prospective life insurance applicants to help them afford to pay the exorbitant insurance policy premiums charged by Allstate and its wholly-owned subsidiary Lincoln Benefit.” Emergent “was one of a small group of life insurance premium financing companies affirmatively approved” by the carrier and its subsidiary company.

When the insured on each policy passed away, Lincoln Benefit took the position that death benefits need not be paid on the three policies because they and “others similarly situated had never been active or in force” since “any life insurance policy issued by Allstate’s wholly-owned subsidiary Lincoln Benefit (whose assets were sold by Allstate to Resolution) and financed through a life insurance premium finance arrangement, like the one the Frankel ILIT, the Matz ILIT and the Pohl Trust, and others, had with Emergent, constituted a “stranger owned life insurance policy” (or “STOLI”) and, therefore, were all void ab initio.”

Emergent is asking that compensatory and punitive damages be awarded in the case and estimates compensatory damages alone to “exceed $32 million..with the potential of exceeding $100 million.”

While we have Lincoln Benefit policies under management we have never had any issues with death benefit payments or even service levels at the carrier since the sales transaction took place.

We will report back with updates as the suit winds its way through the court.

Trustee Alert: Don’t Be a Casualty of the Life Insurance Illustration War

In the 1980s when current assumption universal life (CAUL) hit the market, sales illustrations were created showing cash value returns of 10% and more every year – for a product that was invested in fixed instruments.  When equity markets soared and variable universal life (VUL) became the rage, many sales illustrations projected 12% returns – again, every year.

Life insurance illustrations are at best a guide – they do not guarantee the future, they are based on hoped-for returns which do not occur as projected.  All else equal, in a universal life chassis without secondary guarantees, the higher the rate of return assumption, the lower the premium that has to be shown in a sales illustration to carry the policy to maturity (or some other goal).

The premium shown in a sales illustration is not the cost of the policy – costs are shown on the expense page of the illustration.  An unreasonably high return assumption can easily hide higher policy charges.  Why?  Because over the lifetime of the policy, the highest expense is typically the monthly deduction for the cost of insurance – the mortality charges.  Those charges are based not on the death benefit, but on the net amount at risk, which is the difference between the death benefit and the cash value. (For a more detailed explanation of net amount at risk, go to Chapter 6 of the TOLI Handbook, available as a free download here.)  As the cash value climbs, the net amount at risk drops and the actual charges deducted drop.  A high assumed rate of return creates a double-edged cycle – a higher return creates higher cash value which lowers costs which creates higher cash values.  A perfect situation – for a disaster.

The CAUL policies issued in the 80s and into the 90s with unreasonable returns crashed and burned with policy lapses that fueled the rise the rise of secondary death benefit policies, guaranteed universal life (GUL).  The 12% returns of VUL policies did not hold up either and after the market crash of 2007-08, many people fled to equity indexed universal life (EIUL). These were considered more “conservative” because while the returns were tied to an equity index, an interest rate floor – typically 0%, limited the downside – “you could not lose money” with this product. (Note that even though the investment component may not be negative, policy charges still accrue so cash value does drop.)

The policy also has a limit on the upside, called the cap, set by the carrier.  A policy with a cap of 10%, which is typical, means that any returns over 10% will be lost.  This is one reason that the rate of return assumption in EIUL policies is tricky to project.  When we first started seeing these policies, the assumed crediting rate in sales illustrations was well above 7%, often approaching 8%.  Now with regulation AG 49 in force, sales (and in-force) illustrations are limited to a maximum return of around 7%.  One carrier has created an online tool that translates the actual return in an index, like the S&P 500, into the crediting rate applied to the policy.  For example, assuming a 10% cap and 0% floor, to credit a policy with a 7% rate, the actual return in the S&P 500 would have to be between 10 and 11 percent.

However, there is more.  Regulation AG 49 capped the rate of return that could be shown in the policy, but it did not stop the use of various interest bonuses and multipliers that might not be seen or understood in an illustration.  We are in the midst of an illustration war with carriers determined to create products that illustrate better in a sales situation.  According to one life insurance expert, these AG 49 compliant illustrations can take a “6.75% illustrated rate” and “generate a 9% illustrated internal rate of return on cash value.” (1) The industry is turning lead into gold.

Unfortunately for the TOLI trustee taking in a new policy, this creates issues. As a fiduciary, you must make sure that the assumptions on the asset in the trust are reasonable.  As a business person, you must make sure your clients are not disappointed by policy performance – when the policy crashes, it will be your problem.

So what is the answer?  First, have skilled life insurance professionals on staff.  An untrained administrator will not be able to decipher today’s sophisticated products.  If you do not have skilled staff – find them or outsource the service.

Second, do not accept policies with assumptions you deem unreasonable.  Hopefully the current crediting rates on new current assumption policies and dividends on whole life policies are bottoming out, and rates will be rising – a plus.

For variable universal life policies, review the asset allocation and develop a conservative assumption for the expected returns.  If you think 8% is reasonable in an equity-rich allocation, also show the outcome at 5.5% or 6%.  If a more balanced allocation generates an assumed return of 7%, also show 4.5% or 5%. Show the clients the downside funding needs, you will be glad you did.

For equity index UL policies, get an illustration assuming a crediting rate of 5% along with the 6-7% return that is usually shown.  And make sure you (and your grantors) understand the bells and whistles of the policy. (See Chapter 10 of the TOLI Handbook for a thorough discussion of the equity index UL policy.)

Document the higher carrying costs that come with a lower return assumption and have the client sign a document acknowledging those additional costs and make that a part of your trust file.

Generate a report annually that shows the current condition of the policy and any premium changes that should occur to keep the policy on track.

Do not assume the aggressive assumptions made by salespeople to lower the projected premium and increase the chance of a sale will actually occur.  Your job is not to sell a policy – it is to deliver a death benefit.

Be careful out there.

  1. Voya ICAR & The Indexed UL Illustration War, Bobby Samuelson, The Life Product Review, October 11, 2018

 

Life Insurance Settlement Association (LISA) Challenges Lincoln Enhanced Buyback Offer

Back in the spring, we reported on the Lincoln National “Enhanced Cash Surrender Value” offer the carrier began making to a select group of policyholders.  These unsolicited offers would allow policyholders to receive an amount higher than the current cash surrender value to return their policies to the carrier.

As we noted, the offers were similar to some made on mispriced variable annuities after the 2008-09 financial crisis.  Those annuities had guaranteed minimum income benefits that the carriers felt were too rich in the current investment climate.  The Lincoln offer, however, is the first enriched buyback offer we have seen for life insurance policies.

Life Insurance Settlement Association (LISA), a trade association that promotes the rights of policyholders selling their policies in the secondary market, is now challenging this enhanced offer.  In a letter addressed to the Commissioner of the Florida Office of Insurance Regulation, LISA, through its attorney, alleges that the enhanced cash value offer violates a “slew of consumer protection laws,” citing five separate Florida statutes, and accuses the carrier of “acting as a life settlement provider without the required license.”

According to the LISA letter, the offer was made on 5,300 Lincoln Life Guarantee SUL 2009 policies.  These survivorship policies, which pay out after the second insured dies, are often used in trust-owned life insurance (TOLI) trusts since estate taxes for a married couple are typically paid at the second death.

We oversee 81 policies that have received offers – so far.  While in both the offer letters and the FAQ brochure provided by Lincoln, the carrier notes that their “records indicate” the policyholder has “stopped making regular premium payments,” for a number of our policies, premiums have been paid to date, some each year since policy issue.  The carrier suggests that “missing premium payments can be an indication that your insurance needs may have changed” and asks the policyholder to “consider whether you still want or need the death benefit protection provided by this policy,” or whether the Lincoln enhanced offer “is more important to you than your need to leave a death benefit to your beneficiaries.”

LISA notes that in an attempt to “entice” policy owners to accept their offer Lincoln is using “many of the arguments made by life settlement providers in their marketing,” pressuring “the consumer to act” by providing the option for “a limited time only.”  According to the LISA letter, Lincoln seeks “to entice agents to solicit their clients” to take advantage of the offer “by holding out the possibility of additional commissions” if the client uses the proceeds to purchase a new Lincoln product, noting that “an internal replacement into any new policy or contract will be considered new business and agents will be compensated using the same rate schedule used for new premium.”

A life settlement also pays a commission to those who facilitate the transaction.  Whether a life settlement would be more beneficial for the policyholder is probably not contingent on commissions paid but the facts and circumstances around each policy, specifically the health of the policy and the insured.  Lincoln is offering to pay a premium of between 35% and 200% above the cash surrender value for the policies we manage, without having any knowledge of the insured’s current health. In a life settlement transaction, at least one life expectancy (LE) report is obtained, providing the investor with insight as to the health of the insured, which greatly affects the price offered.

Why would Lincoln do this?  In our portfolio of 81 policies, there is $292 million of death benefit.  Lincoln is offering an aggregate amount of $41 million to re-purchase the policies. The 81 policies have a total surrender value of $25 million, but without surrender charges, the cash values would be $31 million.  We have found that, in our portfolio, the average offer is slightly above the average premium paid. Lincoln is not paying much more than it has collected (and invested) since the policies were issued.  Lincoln is on record as saying that it is making the offer because for policies surrendered, they would “no longer be responsible for the death benefit on the policy.”  This would enable them to release “financial reserves and redeployment of the funds for a different use.”

The life insurance industry is struggling, and carriers are looking for alternative avenues to use their capital more profitably.  This will have repercussions, and in our next blog, we will discuss Voya’s decision to stop issuing life insurance and how it highlights changes in both the life insurance market in general and trust-owned life insurance (TOLI) in particular.

LISA is asking for the Florida Office of Insurance Regulation to investigate Lincoln’s Enhanced Cash Surrender Value Option, and to “take necessary enforcement action if, as we believe you will, you conclude that this program violates Florida law.”  As of today, none of our clients have taken Lincoln up on their offer, but almost all have until the end of March 2019 to do so.

We will report back with any updates.

The TOLI Handbook – Chapter 16: Remediation, the Weak Link for Trustees

A TOLI trustee we work with received a request from a grantor tired of gifting to pay premium on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage.  The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured.

While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit).

Trustee choices in this case:

  1. Guaranteed $3.9 million of coverage with increasing cash value.
  2. Non-guaranteed $3 million of coverage with decreasing cash value.

 

While it seems easy to see the prudent decision is number 1, it was not easy to see at the time.  Why?  Because the trustee did not have all the information or the requisite skill to gather and analyze all the information.  In the decade we have been reviewing TOLI policies – including replacement options – this lack of knowledge and skill has been the weak link for trustees managing ILITs.

And this is a growing problem.  We cite 6 case studies in the TOLI Handbook, each with its challenges, each representing potential liability to the TOLI trustee if handled incorrectly.  And we could have added more real-life situations we have encountered.

If you are a TOLI trustee what do you do when:

  • You take on a portfolio of whole life policies with growing loans?
  • A grantor tells you to surrender their policy or allow it to lapse?
  • Grantors say they want to replace their variable universal life policy with a “more conservative” equity index universal life policy?

 

We guide you through these situations in the TOLI Handbook, a free 155-page PDF we believe represents the best single source of information available for managing TOLI trusts and life insurance.

With the changes in the federal estate tax exemption, you will be receiving more of these types of requests.  They will mean much more work, and more important, much more liability for you.

For a FREE copy, please go to www.TOLIHandbook.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.

ITM TwentyFirst Alert: Lawsuit Filed Against John Hancock for COI Increase

In February of 2017 we reported John Hancock had placed restrictions on certain inforce illustrations. At that time, we mentioned this was a possible precursor to a cost of insurance increase.  A year later the carrier notified the New York Department of Financial Services that it would be raising the cost of insurance (COI) on some Performance UL policies. Last month we reported the first customer announcements for the increase arrived at our NYC office.  Just as COI increases seem to follow inforce illustration limitations, class action lawsuits seem to follow COI increases.

Last week (June 5th), a lawsuit was filed in the Southern District of New York against John Hancock for “an unlawful and excessive cost of insurance (“COI”) increase” on “approximately 1,500” Performance UL policies.

The lawsuit details policy COI increases of 17%-71%, in line our with analysts’ findings.  The lawsuit alleges that increases up to 71% are “far beyond what the enumerated factors in the policy could justify.”

Letters announcing the increase blamed it on “expectations of future mortality and lapse experience,” but according to the suit “mortality expectations have continued to improve” and lapse experience, though “deteriorating…cannot justify any increase, much less one of this size.”  In addition, the recent tax cuts, “should have led to lower COI rates” since John Hancock recently announced, “the U.S. tax cuts will save it $240 million per year going forward.”

According to the filing, the carrier “told regulators as recently as February 2016 that its expectations did not warrant any change in projected COI rates,” and the lawsuit alleges John Hancock “admits” the increase was “driven” by the carriers’ goal to raise or meet its “profit objectives,” which is “not one of the enumerated factors a COI rate increase can be based on.”

The suit asserts the increase is “discriminatory and non-uniform” and “there does not appear to be any actuarial justification for the differences in the amount of the COI increase between policyholders.” For example, “the increase was applied to a standard male insured with issue age 73, but not to a standard male insured with issue age 65, and there is no actuarial reason to treat those two policies in such wildly disparate manners.”

The lawsuit calls for, among other things; compensatory damages and restitution and the “reinstatement of any policy that was surrendered or terminated following Defendants’ breach and unlawful conduct.”  The filing also calls for the court to prohibit John Hancock from collecting “the unlawfully and unfairly increased COI amounts.”

We have been analyzing the nature and amount of the COI increase and will be reporting back shortly on our findings.

A copy of the lawsuit can be obtained by emailing mbrohawn@itm21st.com/.