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


Newspaper Headlines Highlight Changes in Life Insurance (and TOLI) Business

On October 30th, Voya Financial, a company we wrote about because of a lawsuit filed against it for cost of insurance increases that occurred on universal life policies sold in the past under the Security Life of Denver banner, announced in its third-quarter earnings call it would be ceasing all life insurance sales as of the end of the year.

The company, which was spun out of ING Group, a large financial services firm operating in 40 countries around the world, is not leaving the market because of any litigation.  It is leaving because the permanent life insurance business faces a “sluggish environment” according to a Wall Street Journal report. (1)  The article reports that “since the 1980s, sales of individual life insurance policies have dropped 45%” and in the last few years have been flat.

Voya’s life insurance business the last few years has been bolstered by sales of equity index universal life policies which made up the bulk of Voya’s life sales, a product being packaged by the industry as a retirement supplement vehicle, as the life insurance industry moves from death benefit to retirement funding sales.  As the WSJ article points out many consumers today “are more concerned about outliving their savings than dying prematurely.”

Voya is leaving life insurance sales to focus on pure retirement funding investment management and employee benefit opportunities.  In a Voya press release, Rodney O. Martin, Jr., chairman and CEO, said that going forward Voya would be “focusing on the workplace and institutional clients” and that stopping the sale of new life insurance “aligns with our plans to focus on our higher-growth, higher-return, capital-light businesses: Retirement, Investment Management and Employee Benefits.”  (2)  Voya will continue to administer the current block of in-force business.

The individual life insurance market suffers from an aging workforce and lack of “new blood” to the industry. The average age of a life insurance agent is approximately 60, there are fewer opportunities for new agents to join the industry and according to one survey, the younger generation views life insurance as boring. (3)  As the old guard retires, there may not be enough seasoned agents to replace them.  This is unfortunate, especially in the “higher end” market where wealthy individuals use sophisticated products and strategies in trust-owned life insurance (TOLI) policies and put pressure on a TOLI trustee to be well versed in the changing permanent product landscape.

Ironically, another headline posted the same day points out the new direction of the market.  Ethos, a Silicon Valley start-up that says it can “process life insurance in a matter of minutes” raised $35 million in a funding round that values the firm at “more than $100 million.” According to an industry article, the company “uses data analytics to predict a person’s life expectancy” and this enables it to “cut the time normally taken to apply for life insurance from 10 weeks to 10 minutes.”   The company’s funding has come from big business names like Google and entertainment figures like Jay Z, Robert Downey Jr, and Will Smith.   The company is focused only on term insurance providing 10 to 30 years of coverage for those in the “prime” of their life.

Making life insurance easier to purchase is a great selling point, and many carriers are stepping up with AI and algorithms to speed the underwriting process along, but in the high-end market where life insurance is still used for estate planning, permanent products, not term insurance is typically used.  Term is more of a commodity sale, the only real differentiators being price, carrier stability, and conversion options, so it lends itself to this quick online sales process. Permanent products need consultation, as their nuances and application are harder to explain.

In the TOLI market, there will always be a need for a good advisor to oversee the purchase and management of life insurance.  As we move forward, we think that role will fall more to the TOLI trustee, who more than ever will have to be a specialist in this asset.

  1. Another Insurer to Cease Selling Life Insurance to Individuals, Leslie Scism, Wall Street Journal, October 30, 2018
  2. Voya Financial, Inc. (NYSE: VOYA) today announced financial results for the third quarter of 2018, Business Wire, October 30, 2018
  3. One in four insurance agents will be gone by 2018, Caitlin Bronson,, February 23, 2015.
  4. Google, Accel, and Jay Z invest in life insurance start-up Ethos, valuing it at more than $100 million, Ryan Browne,, October 30, 2018

Why the Cost of Insurance Increases? Some Possible Reasons

In the past few years, we have posted many entries dealing with the cost of insurance (COI) increases we have seen in Current Assumption Universal life (CAUL) policies. Almost three years ago, we were among the first to begin ringing the bell on this issue (see: If The Cost Of Insurance Goes This High, You Are Guaranteed To Have Some Angry Clients.) We have been asked by many of our trustee clients to explain the possible reasons for these increases.
If you have attended any of our webinars explaining life insurance (see:, you know that Universal Life is a transparent policy, meaning you can actually see all of the costs in the policy. The beauty of the product is not only its transparency, but its simplicity. I like to explain it as a bucket with a spigot on the side. The premium placed in the bucket grows tax deferred, and each month, the carrier deducts the various charges in the policy from the cash value, with the COI typically being the largest charge.
There are four different factors that impact pricing or costs in a CAUL policy:
  • Mortality
  • Investment earnings
  • Persistency
  • Overhead or expenses
We will leave mortality until the end and begin with investment earnings. Part of the profit earned on a CAUL policy comes from what is called the interest rate spread, the difference between what a carrier earns on its investment and the amount credited to the policy. The bulk of the investment in a CAUL policy is in fixed vehicles. These policies were born in the early ‘80s, an era of sky-high interest rates. Today’s historically low interest rate environment has put tremendous pressure on the carriers. In fact, we pointed out in September of last year (see: Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees) that Transamerica’s investment returns appeared to be lower than what it was contractually obligated to pay on a policy we reviewed. That fact was also noted in the lawsuit filed last month against Transamerica (see: Consumer Group Files Suit against Transamerica for Cost of Insurance Increases) that alleged that Transamerica’s real reason for the COI increase was “to subsidize its cost of meeting its interest guarantee, to recoup past losses on the policies and on its investment portfolio, and to make the policies more profitable by inducing policy terminations by those policyholders who could not afford the increase.”
It is interesting that the lawsuit referenced above mentions inducing policy terminations. Persistency is one of the factors in policy pricing that the consumer does not see in an accounting of the policy, but plays a role in policy profitability.
Carriers expect a certain percentage of people to drop their policies in the early years and often build that into their pricing model. According to studies, you can expect 9% of policies purchased to be dropped in the first year alone, and by the end of 10 years, approximately 49%  have been surrendered or lapsed (1). In the early years, the policyholder pays much more in premium than the actual cost of coverage. If you surrender a policy in those years, you recover little (because of surrender charges), and you will have overpaid for your coverage. Although the carrier has acquisition costs in those years, they are still well ahead, helped greatly by those early surrenders. If fewer people than the company estimated leave early, their pricing model can suffer. It appears that in some situations this may have happened.
Overhead expenses are another factor in pricing. Servicing in-force business has become a drag on profits, so much so that at least one carrier (one of the carriers who raised COI) will only accept one illustration request per year free of charge (up to 3 illustrations per request), then charges a fee for each additional request.
Increasing reserve requirements are also playing a possible role in the pricing strains that carriers have felt. Most of the carriers raising COIs are European-based companies subject to Solvency II, a European Union regulatory overhaul of the insurance industry that could be affecting policy pricing because of a tightening of capital requirements. It is interesting to note that executives of six American-based life insurance carriers reportedly said they would not be raising COIs, though they did say that if interest rates remain low, they would not rule out an increase in the coming years (2).
Which brings us to mortality, the pure insurance component of the policy. Carriers begin with mortality tables to provide a basic estimate of the risk of death at each age. But carriers also underwrite their risks differently, and while the underwriting differences are not great, they may play a role in differences from one carrier to another.
Marketing and business decisions can play a role in actual costs. For example, in years past, there were “shave programs” at some carriers that allowed the underwriting to be artificially improved to generate lower premiums for the consumer and new business for the carrier. And I can remember back in my brokerage days a number of carriers who loosened underwriting requirements in December to hit their year-end numbers. Those cases may be coming back to haunt some carriers.
One carrier raising COI cited issues with conversion policies, those term policies that can be converted to new permanent policies without undergoing underwriting. The carrier in question was a big player (and still is) in the term market, and some of those that converted their term policies to CAUL policies with the carrier did so because they had a health issue that would not allow a fully underwritten policy to be obtained at better rates with another carrier. In other words, this term carrier was subject to adverse selection…those who could, got better rates elsewhere. Those who could not settled for converting their existing term policy.
Some pundits believe that the carriers actually have no issues with their mortality calculations and that the insured in these policies are not dying earlier than expected. According to actuaries, we are as a group living longer (3). And there has been a recent report that the wealthiest among us (who tend to buy more and larger policies) have a longer lifespan (4). These reports suggest what the attorneys in the Transamerica lawsuit referenced when they asserted, “Transamerica raised its COI not because of mortality issues, but because of other factors, chief among them the low interest rate environment.”
Should the Transamerica lawsuit referenced here and another lawsuit we cited in a past blog (see: John Hancock Hit With Class Action Lawsuit Over Cost of Insurance In Some Universal Life Policies) go to court, we may find out whether the carriers’ expectations regarding mortality assumptions were correct, but until then, there is no way to know.
Whatever the outcome, it is not much solace to the grantors we are dealing with that have been told to double the gifts to their trust just to keep their policies in force. As I have mentioned in the past, managing life insurance policies has gotten much harder.
  1. Lapse-Based Insurance, Daniel Gottlieb and Kent Smetters, April 15, 2014
  2. The Life Settlement Report – November 5, 2016
  4. The Rich Live Longer Everywhere. For the Poor, Geography Matters, New York Times April 11, 2016

Life Insurance Underwriting Classifications

In my last entry, Underwriting Life Insurance….What Every Trustee Should Know, I wrote about the steps that should be taken to ensure the best pricing when purchasing a life insurance policy. The difference in underwriting offers can play a large role in the success of the ILIT you are managing.   After all, keeping a policy in force over the lifetime of the Insured is much harder if the policy pricing is dramatically higher. In a new policy placement case I reviewed, the offers from the 3 carriers deemed to have the best chance of providing economical coverage were dramatically different, causing a wide gap in pricing. A male, age 52, who was large in build, but with no outstanding health issues, was applying for $5,000,000 of 10 year Level Term coverage. As you can see below, he received offers that varied in cost by almost 100%.

  • Carrier #1: Rated Table C, annual premium of $18,586
  • Carrier #2: Standard, annual premium of $13,535
  • Carrier #3: Standard Plus, annual premium of $9,500

After I wrote that last Blog entry, I hosted a webinar designed to acquaint Trustees with the nuances of underwriting life insurance. One of the questions I got afterwards was about the differences in underwriting classifications and “rated” policies. A great question.

In general, there are three main underwriting classifications with some carriers providing sub-classifications (as in example above, Standard and Standard Plus).

Preferred underwriting is reserved for only the healthiest individuals, with no adverse medical history. Usually, they are not on medication for any condition and have no family history of early onset diseases. They are at an ideal weight for their height, with an acceptable body mass index. They have never smoked tobacco, or if they have, they have quit for extended period of time. In addition, they do not participate in high-risk behaviors. By the way, a person who smokes can get Preferred Smoker rates, if all else (except the smoking habit) is as above.

A person who obtains Standard underwriting has an average health and normal life expectancy with lab results in the normal to slightly abnormal range and can have some negative family health issues, but does not participate in dangerous sporting activities or have a hazardous occupation.

Those considered “Rated” or Sub-Standard are those deemed to have a below average life expectancy.  They typically have a height to weight ratio considered undesirable. They may have been treated in the past with an illness, or have a chronic illness or other major health issue. They almost always have bad or questionable lab results. Note: It is rare for a carrier to provide an underwriting offer if the applicant is currently going through a health issue. It is not that insurance cannot be obtained at some point in the future; it is just that the carrier needs to be able to assess their risk. If the applicant is in the midst of a current health issue, that is impossible to do.

Carriers have different ways of dealing with rated policy pricing. They can increase the premium by “rating up in age”, where they simply raise the age of the Insured from their actual age to a higher age based on the health of the Insured. This results in a higher cost of insurance in the policy to account for the health issue. Another method is to use a Flat Extra, an extra cost per thousand of insurance coverage that is added to the base premium. A Flat Extra can be put on for a short period of time. For example, a Flat Extra could be put on for 5 years only after a successful treatment for cancer. Or the Flat Extra could be more or less permanent. A Flat Extra could be added for a recreational pilot and be a part of the policy pricing as long as the Insured was participating in that type of aviation.

The most common method of pricing a sub standard case is with a Table Rating where a number or letter grade is assigned to the sub standard rating with an increasing cost of insurance as the rating goes up. The table below shows the increased cost of insurance within a policy as the table rating goes up. A Table 2 rating would mean that the policy would have a cost of insurance that was 150% of the Standard rated cost. Remember, that in a Permanent policy, the cost of insurance is not the only cost in the policy but it is by far the greatest cost. Other charges, including administration fees, costs of riders, etc., are added to the pure mortality cost of the policy, but the cost of insurance, over the life of the policy will be the most significant expense. Hence, the importance of the underwriting obtained at policy issue.























So, how can the difference in underwriting offers vary so much between carriers? Each carrier has an underwriting handbook that spells out the general parameters of their underwriting classifications, but underwriting is as much an art as a science. A good Underwriter will know which carrier is “best” for each type of health issue. Some carriers have had better “luck” underwriting certain ailments and price accordingly and a good Underwriter will know this. Some carriers pay more attention to “Lifestyle Credits”. Does your client exercise regularly, is he or she married, active in the community, adhere to any special diets? Any of these things may put them in a better light at certain carriers. And some carriers just view the same health information differently.  Also, remember that this is a business and in business, business decisions are made. A good Underwriter who is part Quarterback, part Advocate for your client will be able to drive a favorable business decision.

As a Trustee you may not be part of the underwriting process, but you should be aware of the importance of underwriting and be aware of the underwriting skill of the life insurance advisor and firm you are working with. It may save your client some money.

Underwriting Life Insurance….What Every Trustee Should Know

Recently, the Guinness Book of World Records announced the purchase of the world’s most valuable life insurance policy, a $201 million dollar policy. The previous record according to Guinness (although I have heard tale of cases that surpass both of these) was a $100 million dollar policy on David Geffen, a  founder of DreamWorks Studios, who got his start working with up and coming California rock stars like Jackson Browne and the Eagles.

The “record setting” Insured in unknown, described in various reports as “a California technology billionaire”.  The policy was placed by SG LLC, a California firm run by Sergey Grishin, a Russia-born entrepreneur.  While the multimillion dollar commission is quite the payday for any writing agent, it clearly will not affect Mr. Grishin’s lifestyle as he is reportedly worth over a billion dollars.

The title, “world’s most valuable life insurance policy” is a misnomer. In fact, no single policy with one carrier would ever get close to this amount. The $201M coverage placed was reportedly underwritten among 19 carriers.

Underwriting life insurance, even “small” policies in the $1-20M range, is an unknown process for many Wealth Advisors and Trustees, which is unfortunate since underwriting can dramatically affect the pricing of a policy.

One thing that affects the underwriting process on larger cases is the capacity of the carrier.  Capacity, also known as retention, is the amount of coverage a carrier can retain on its books before involving a re-insurance carrier. Carrier capacity can be as little as $500,000 to as much as $20M.  No carrier wants to carry on its books a liability on a single person that can affect its short term financial situation.  A few years back a big name carrier had a quarterly loss driven almost exclusively by the death of one individual.

In order to alleviate this problem, carriers look to the re-insurance market, where carriers go to insure their insurance obligations.  They “cede” a percentage of the death benefit they issue to other firms, who are then responsible for the death benefit claims.  Some of this occurs through automatic reinsurance agreements between a carrier and a reinsurer which can allow the carrier to bind coverage with the reinsurer without sending the case to the reinsurer for review.  Facultative reinsurance refers to those situations where the reinsurer reviews the application and has the ability to decline or accept coverage.

There are a number of simple rules to follow when underwriting a client to ensure that the best pricing is obtained.  You may not be able to directly control the process, but if you are a Trustee or a Wealth Advisor working with an Agent, you need to be aware.

First of all make sure that the firm you are working with has an in-house Underwriter that can act as an advocate for your client.  Most life insurance is placed through an intermediary firm that works with a number of different carriers.  Having an Underwriter, especially one with a strong health background, will be a plus.

Focus on specific carriers, do not shotgun the effort.  It is better to work with an Underwriter who understands carrier strengths and weaknesses than to send the case to many carriers. Some carriers are better at underwriting specific ailments and your Underwriter should know that.

Make sure the underwriting package is complete, makes sense and comes with a cover letter explaining the reason and need for the coverage and any pertinent details.  Think about it….if you are reviewing cases at a carrier and you have two files on your desk, one that is complete and concise or one that is incomplete and incoherent, which one gets your positive attention?

Almost every underwriting process will include a medical exam, the paramed.  Scheduling the exam in the morning before the day gets too hectic, and fasting before the exam are two tips that will help the outcome of the exam.  Limiting coffee, alcohol and strenuous exercise leading up to the exam will also help.

While most Agents seem to focus on a “spreadsheet analysis” for carrier pricing, I have found that the underwriting process is the most important aspect of determining policy.

If you are a Wealth Advisor, CPA, Attorney or Trustee working with wealthy clients you should understand the basics of life insurance underwriting.  On April 29th I will be hosting a webinar entitled What Every TOLI Trustee Needs To Know About Life Insurance Underwriting.  The one hour webinar will expand on this Blog and provide you with a working background on the subject.  A Handbook will be provided for your future reference.  Please go to our web page at to sign up.