Take the TOLI Challenge: Only Permanent Life Insurance Policies Can Be Sold, True or False?

Earlier this year we started the TOLI Challenge with the question: What is most important when determining the liability of a trustee’s actions? Click here for that answer.  Today, we have a follow up true or false question.

Only permanent life insurance policies can be sold in the life settlement market, True or False?

It may surprise you that the answer is false – some term policies actually can be sold.  Term policies, without cash value, are most often surrendered back to the carriers for no value when, under the right circumstances, they can be sold into the secondary market, providing the trust with additional cash that can be passed down to the beneficiaries or used to fund other policies.

The key is whether the policy is still convertible.  As you may know, term policies can have a feature that allows the policies to be converted to a permanent policy with the same carrier at the same underwriting class but at the new age of the insured.  So, a term policy taken out on a 45-year-old insured ten years ago and initially underwritten as a preferred risk can be converted to a permanent policy at preferred rates for a 55-year-old – without the insured going through the underwriting process.

Most conversion options are for a limited period, or to a certain age, so you must check to see if the term policy conversion option is still available.  If it is, the policy may be marketable.

To see if it is, you will have to ask the carrier to provide you with a conversion illustration showing the premium requirements for the new permanent policy.  Once obtained, you can contact a life settlement broker who will review the policy costs and the health records of the insured to determine whether the policy is saleable and at what price.

Not only are convertible term policies often sold into the secondary market, they rank just behind current assumption universal life policies, as the most popular life settlement policies.  However, most TOLI trustees are unaware of this opportunity.  The fiduciary duty of a TOLI trustee includes maximizing the value of the asset in their trust – even a term policy that appears to have no value.

New Legislation Introduced in Congress Would Help Seniors and the Life Settlement Industry

A bill introduced in Congress could help spur sales of life insurance in the secondary market by allowing policyholders to use the proceeds from the sale of a life insurance policy to fund an account to be used for paying long-term care expenses on a tax-favored basis. 

HR Bill 7203, introduced by U.S. Rep. Kenny Marchant of Texas, a Republican, and U.S. Rep. Brian Higgins of New York, a Democrat, has been referred to the House Ways and Means Committee. The bill would allow policyholders to reduce “the amount of gain from the sale or assignment of a life insurance contract … by the amount of contributions to a long-term care account” as long as the contribution was made “during the 30-day period beginning on the date of such sale or assignment.”

Currently, in a life insurance policy sale, the policy owner is taxed on the amount above the cost basis – typically the premium paid. This new law would allow a policy sale to occur tax-free, and then allow the policyholder to place the proceeds into a newly created long-term care account that would be “exempt from taxation” as long as the account was used for paying for long-term care.

Tax-free distributions could be made from the accounts to pay for “qualified long-term care services” as well as “premiums for a qualified long-term care insurance contract,” for both the beneficiary and the beneficiary’s spouse, and after the death of the account beneficiary, the account would revert to the spouse.   

The accounts created would be held in trust by a bank, an insurance company, or “another person who demonstrates to the satisfaction of the secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.”

Any amount distributed from the account that was not used exclusively for long-term care would be includable in the gross income of the beneficiary and subject to a 20% surcharge, except in cases where the beneficiary dies or becomes terminally or chronically ill under current law. 

The proposed law greatly expands the tax advantages of selling an unneeded life insurance policy in the secondary market, and if passed, would provide the policyholder with another reason to explore the life settlement market.

We will report back on the progress of the bill as it moves through the legislative process.

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.

Phoenix Announces New Cost of Insurance (COI) Increases

This week our New York City office received letters from Phoenix alerting us to cost of insurance (COI) increases on Accumulator (I, II, III, and IV) and Estate Legacy Universal Life policies.  Per the carrier, the cost increase was necessary because “certain anticipated experience factors are now less favorable than we anticipated when we established the cost of insurance rate schedule.”  According to the letters we received, there will be a flat “overall increase to cost of insurance rates, as well as progressive increases…beginning when an insured reaches age 71 through age 85.”  A Phoenix representative told us that for policies on insureds older than 85, the full increase will be implemented at once.

Policy cost increases will take place on the next anniversary date after November 2017.

Some Accumulator products will not feel the effect of the increase until after December 31, 2020.  Those policies were part of the Phoenix lawsuit that was settled in 2015. In that case, Phoenix raised the cost of insurance on Accumulator policies issued between 2004 and 2008, with face amounts of $1,000,000 or more, and issue ages equal to or above 65 or 68, depending on the policy. The plaintiffs alleged that the increase, which took place in 2010 and 2011, “did not apply uniformly to a class of insureds, discriminated unfairly between insureds of the same class, and were improperly designed to recoup past losses” (1).

While Phoenix denied the charges, they did agree to establish a settlement fund of up to $42,500,000 as compensation for the affected policyholders. In addition, the carrier agreed to “not impose any additional COI rate increases” on the affected policies, “through and including December 31, 2020” (2).

While we do not know the COI percentage increase, we have been told by carrier representatives that it will be consistent across each individual policy type.

According to the carrier, illustrations will be available 11/6/2017 reflecting the future cost increase for all policies affected, even those that were part of the settlement.  We will be reviewing that information, and will publish our findings.

  1. Frequently Asked Questions, http://phoenixcoisettlement.com/
  2. Decision and Order Approving Class Action Settlement and Approving Motion for Attorney Fees, 9/9/15, http://phoenixcoisettlement.com/

TOLI Trustees Need To Be Aware Of Life Settlements

It is estimated that every year, seniors in the US surrender or lapse over $112 billion dollars in life insurance death benefits (1). Most of them probably have no idea of their options, but grow tired of the premium payments and walk away without maximizing the value of an asset they may have paid for over a lifetime. For the uninformed consumer, this could be just a lost opportunity, for the Trust Owned Life Insurance (TOLI) trustee, this can be a source of potential liability.

An alternative to a policy lapse or surrender is a life settlement, the sale of a life insurance policy for a lump sum greater than the policy’s cash value and less than the death benefit. The purchaser of the policy will maintain the policy by paying the policy premium until the death of the insured.

The life settlement industry grew out of the “viatical” movement of the of the 1980s when AIDS victims were given the opportunity to sell their life insurance policies to a third party for a lump sum payment to be used to provide medical and other care in the final years, sometimes months, of life. Advances in the treatment of AIDS made these types of policy sales less common, but the idea of life insurance as an asset that can be sold grew into the life settlement, or secondary marketplace, we see today.

Originally the industry was lightly regulated and some who sold their policies were taken advantage of, but today’s life insurance settlement marketplace is heavily controlled. The vast majority of states (42) have strict regulations that provide a framework for the orderly transfer of policies, with required consumer disclosures that protect the policy seller. The improved regulations have dramatically decreased issues in the sales process.

For the TOLI trustee managing life insurance today, life settlements are an option that must be considered. Because of changes in the estate tax, increased policy costs, and the natural evolution of trust goals, there are more “unwanted” policies to deal with than ever. Those of you who have attended our ITM TwentyFirst University sessions in the past know that we have developed many methods for analyzing options to maximize the value of a life insurance policy. We do this because it is our clients’ (TOLI trustees) responsibility to maximize the value for their clients (life insurance trust beneficiaries), and life settlements can be a way to do that.

Typically, life settlements are available to insureds age 65 and older, though health will play an important role in whether an offer is forthcoming. Most policies sold are universal life policies – especially current assumption universal life, though other policies, even term insurance policies that can be converted to a permanent policy, can be sold. The offers depend on the death benefit of the policy, the annual premium needed to carry the policy, the life expectancy of the insured, and the rate of return that the buyer needs to make the purchase a viable investment.

The sale of a policy has potential tax implications to the seller. A life insurance policy held in trust until a death benefit is paid is received income and estate tax free, however if a policy is sold there is a possible tax liability to the trust.

While all the advantages and disadvantages of a policy sale are beyond the scope of this article, we believe that the full discussion of life settlements in the TOLI world is important enough to schedule a webinar session that will provide a TOLI trustee (and all financial professionals) with a thorough understanding of the process. Our next free webinar session, entitled Learning When Why and How to Do a Life Settlement, will be held on March 28th at 2 p.m. Eastern Time, and will provide one hour of continuing education for CFP, CTFA and FIRMA members. You can register here.

  1. LifeHealthPRO, February 25, 2015, Forfeited Life Insurance Benefits Pegged at $112 Billion

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.

An Ongoing Case in California You Should Be Aware Of If You Are a TOLI Trustee

An interesting class action lawsuit filed in January of this year is unfolding in California. The case, Larry Grill et al v. Lincoln National Life Insurance Company, was brought against the insurance carrier for “concealing from its insureds the option of a life settlement in connection with their life insurance policies.”

In an all too common scenario (which I am sure you have seen), the grantors of a trust, currently in their mid to late 70s, decided they would no longer gift an amount to their trust sufficient to carry the life insurance policy in the trust. The $7.2 million policy was reduced to $5.4 million in 2008 and then down to $2 million at the end of 2009. In both instances the agent on the policy provided the “Plaintiffs with detailed illustrations prepared by Defendant.” However, according to the complaint, the agent presented only “two options—paying new premiums into the Policy or surrendering all or part of the Policy—and failed to advise them of the third option of a life settlement.” Because of the concealment of the settlement option, the “Plaintiffs surrendered over $5 million . . . for no consideration.”

This case has generated a lot of discussion, especially in the life-settlement industry. Clearly, the more often life-settlement options are discussed the better for an industry that seems to be recovering but is still just a fraction of what it once was. So this case, especially if the plaintiffs prevail, will be a bell ringer for them.

But the main discussion is about whether or not Lincoln National and the agent have the responsibility to inform the client of the life settlement option. A LifehealthPro article notes that Lincoln “argues that insurers are not fiduciaries under California law.” That same article also mentions that “Maher Asatryan, a Los Angeles-based attorney, points out that the California Supreme Court concurs with Lincoln’s position.” Nevertheless, the case is moving forward, and the plaintiffs will try to prove otherwise.

I do not purport to be a legal scholar, and I am not saying I understand all of the nuances of this case. But here are a couple of things that I do know:

  • If you are a corporate trust-owned-life insurance (TOLI) trustee, you are a fiduciary.
  • While the plaintiffs say they “surrendered” over $5 million dollars, we know they did not. In order to keep the policy in force at the $7.2 million death benefit, they would have had to pay substantial premiums, probably for many years; so the amount that they “surrendered” would be much smaller.
  • If they were given the option to sell the policy, they would have surrendered a significant amount anyway. Yes, a settlement company would have given them an amount greater than the cash value of the policy, but it probably would not have given them anything approaching the death benefit of the policy.
  • Regardless of the “numbers” in this possible transaction, the fact is that the plaintiffs (or others like them) may not have even been eligible for a life settlement. In an earlier blogpost titled ”A Short Primer on Life Settlements for TOLI Trustees,” I explained it this way: “In order to qualify for a life settlement, it is typical that the insured would have suffered a health impairment since the purchase of the policy that shortened his or her life span. That impairment creates the arbitrage between the actual life expectancy of the insured and the underwriting classification of the policy. For this reason a life settlement will work for the buyer, and it may perhaps be a reason for you, as trustee, to keep the policy.”

In that earlier post I outlined my feelings about life settlements. I believe that unless a policy is to be surrendered or will lapse, a life settlement is rarely the best option. I cited a study that bears this out (though many in the life settlement industry will dispute it). But in that blog I also said this: “There is no doubt that there are times when a life settlement makes sense. . . . In fact, not exploring a life settlement option in those situations may be possible grounds for litigation. And there are a multitude of different options in the marketplace today, including ones that offer interim policy funding so that at least a partial death benefit can be paid in the future. The entire settlement marketplace should be explored.”

If you are a corporate TOLI trustee in a situation where a life settlement can possibly be perceived as an option, you need to make sure your files contain either the reasoning behind not pursuing a life settlement or the outcome of pursuing that option. As I have mentioned, often a life settlement is not a viable option. But how do you prove that—especially many years down the road when a beneficiary brings it up? I often ask agents or advisors for information about options and am told that the particular option makes no sense at all, so why would I need to see it? My answer is always the same: “We may both know it makes no sense, but I may have to prove that in the future, and I may not be able to go back and gather the information to do that twenty years from now. I have to make sure the trust file contains information on every option available, including a life settlement.

If you are a corporate TOLI trustee, make sure your files contain everything you need to show that your decisions are prudent concerning life settlements and that you have considered all options. Unlike Lincoln National or an agent, you cannot dispute the fact that you are a fiduciary.