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.
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
We will report back on the progress
of the bill as it moves through the
want to thank all ITM TwentyFirst clients
for another remarkable year of growth. Without the support of our partners at
banks, trust companies, family offices, and
law firms across the country, we could not sustain the growth that has made us
the largest manager of in-force life
insurance in the country. So, thank you
for our growth over the years has been the quality of our team. From the beginning, we have focused on internal
education to provide our staff with an edge in the market, and over the years
we have also trained peers and regulators through our outreach programs. In 2018, we released a free PDF entitled the
TOLI Handbook, the culmination of over a decade of real-world insight
translated into a guide for the management and administration of TOLI trusts.
The PDF is available for free at TOLIHandbook.com.
We at ITM
TwentyFirst have always listened to our clients. We started by creating a software program
that TOLI trustees could use to manage policies. When clients asked if we could
do more, we created the Managed Solution, total outsourcing of TOLI trust administration
and policy tracking and remediation. In
the last few years, we heard from clients
looking to offload a portion or all of their ILITs to a firm that would not
compete with them in other areas and in 2018 we started the Trust Owned Life
Insurance Company (https://lifeinsurancetrustco.com/) the only trust company in the US focused on
life insurance trusts. Our initial year
has been very promising, and we look forward to helping trustees deal with this
news in the TOLI industry this year? It
had to be the changes in the estate tax laws brought about by the signing of
the Tax Cuts and Jobs Act by President Trump. The law raised the federal estate
tax exemption from $5.49 million to $11.18 million and dramatically
lowered the number of estates
subject to the federal estate tax. It is estimated that with the higher
exemption amount less than one of every 1,000 estates will subject to the tax.
mean more work for a TOLI trustee who, besides managing a policy, may now have
to justify its value to a grantor. A
savvy trustee will explain to the client that the estate tax law changes made
the policy in the trust more – not less – valuable. If the grantor no longer needs the policy to
pay estate taxes, that just means that more of the benefit is going to the
beneficiaries – and wasn’t that the goal in the first place?
grantors will still want to make changes – perhaps lower the death benefit or
limit the gifting that must occur going forward. This will mean more remediation services will
be required for a TOLI portfolio and we have found this is the weakness in many
TOLI trustee service platforms. Having a
life insurance expert on staff will be a necessity going forward unless you
outsource that job. Remember that even
if the grantor no longer thinks they need as much death benefit – or any death
benefit – your job, actually your responsibility as a trustee, will still be to maximize the asset in the trust.
we have seen trustees slip is policy replacement analysis. Some agents are using the changes in the
estate tax as a marketing tool to engage grantors and recommend a change to the
policy in their trust. The sale of
permanent life insurance in the estate planning market has dropped. LIMRA, an
industry organization, reported that the
total number of policies sold market wide dropped by 3% in the 1st
quarter of 2018. The biggest drop was in
guaranteed universal life (24%), a policy often used in estate planning. Variable and index universal life policies
saw gains, but only because the industry has shifted its marketing from death
benefit sales to income retirement sales and these policies are being touted as
excellent vehicles for that use. (2)
Agents that have focused on the estate planning market are simply not
selling the volume of new policies they have in the past and have redirected
efforts to replace existing
policies. Throughout this year – in
blogs and education programs – we have pointed out “bad” replacement
efforts we have caught. For one brought
to us by a prospect for review two years after the fact, we could do nothing, and he wound up writing a high five-figure check to make the client
whole. The prospect is now a client of our Managed Solution.
sign – the clamor among the states and associations for a Best Interest
Standard. New York has led the charge with a regulation that would require
agents to provide “the product that best
reflects the customer’s interest,” not “what is most profitable to the
seller.” The Certified Financial Planner (CFP) Board already has standards in
place that all CFP designees act with
“honesty” and “integrity,” always “in the client’s best interest,” placing the
interests of the client above the interests of the CFP. (3)
One area we
have seen increased activities this year is the life settlement market. The sales of life insurance in the secondary
market has been trending up in the last few years, and though 2018 statistics
are not in the conversations we have had with those in that market lead us to
believe that sales will be up again. The
changes in the estate tax have had a positive effect on sales and a change in
the taxation of a policy for a seller has also helped. In the past,
a seller of a policy would pay taxes on the difference between the cost basis
and the sales price – but there was a twist.
Since 2009, tax laws made the seller subtract the cumulative cost of insurance charges assessed against
the policy from the cost basis creating a higher tax bill. The new tax law did away with that, reducing
the tax burden on those who sell their policy.
insurance (COI) increases continued in 2018 with well-known carriers like John Hancock and Lincoln National raising
costs on legacy policies. We reported on
several court cases filed against
carriers that had raised their costs and in each case the carrier had to “give
back” some of the extra charges, though whether it was enough to keep others
from raising costs remains to be seen.
We at ITM
TwentyFirst are grateful for a challenging, but eventful
year, one that has seen the company grow dramatically. We now have locations in four cities and
cover the country from coast to coast. Our product line is expanding, and our company has grown to over
150 team members while still keeping in place
the high service level standards we are known for.
We are grateful
for the opportunities ahead of us and again thank you for your trust and your business.
For the last few years, we have tracked the dividends paid by four large mutual carriers whose
main product offering is whole life.
These carriers are owned by their policyholders, not stockholders and
operate with a long-term business view. Unlike most life insurance carriers, they
sell their products through a career agency system – a dying breed. Their dividend rate and payments are a major
marketing tool for their agents and dropping dividends is never a major selling
point. But in the last decade, even they
succumbed to the historic low-interest rate environment and dividends trended
The big four carriers
we have tracked – Northwestern Mutual, Mass Mutual,
Guardian Life, and New York Life expect higher dividend
payouts for 2019.
Northwestern Mutual: Will pay out $5.6 billion, up from $5.3 billion in 2018
Mutual: Will pay out $1.72 billion, up from $1.6 billion in 2018
Will pay out $978 million, up from $911 million in 2018
New York Life:
$1.8 billion, up from $1.78 billion in 2018
four carriers appear to have held or raised dividend
investment rates (DIR), with none dropping,
a good sign. The DIR drives the actual
dividend amount paid.
Northwestern Mutual: At 5%, up from 4.9% in 2018
Mutual: Stays at 6.4%, as in 2018
Stays at 5.85% where it has been since
New York Life:
Although they have not released yet, it appears
to stay at 6.2%, where it has been since 2015
Overall, the dividend direction is positive. We will not be seeing the 8% plus dividends of the 90s or early 2000s, but the worst seems to be over with dividend interest rates heading up, not down. And that is a reassuring sign for those of us who manage whole life policies.
In a future blog, we will
review the components that makeup and drive the dividend calculation.
In our last blog, we wrote about remediation and the challenges that TOLI trustees have when managing a policy. Remediation is not just developing the best options for an under performing policy, increasingly it means maximizing the value of a policy that a grantor believes is no longer needed, or one whose expected funding has stopped. These decisions must be well-thought-out and every data point that can be gathered should be utilized in a process that prudently steers the choices made. Often the decisions made are not black and white, they are grey and while the outcome may not be controlled, the process can.
One tool that TOLI trustees need to become aware of is a life expectancy (LE) report. It grew out of the life settlement market where investors needed to gauge the expected lifespan of an insured and the premium costs until a benefit will be paid to calculate a fair purchase price for a policy that would enable them to make a profit on the investment.
It also provides a great tool for TOLI trustees attempting to make decisions about the management of a policy. The underwriters at ITM TwentyFirst determine the life expectancy calculation based on age, gender, lifestyle, smoking status, family history and medical condition (underwriting factors) to create the LE report. The life expectancy report typically includes the life expectancy estimate and can include the probability of mortality each year based on the insured’s specific underwriting factors. The best way to show the value of an LE report is through an example.
A trustee of a portfolio of three current assumption universal life (CAUL) policies totaling $10 million in death benefit has been informed by the grantor, a male, age 85, that no more gifting would occur to the trust. The trustee contacted the beneficiaries who informed the trustee they too were not interested in providing additional funding. The trustee was concerned about the possibility of policy lapses but wished to uphold his responsibility to maximize the benefit of the trust to the beneficiaries.
In force illustrations were obtained on all three policies assuming no further premium was going to be paid into the policies. In addition, a life expectancy report was obtained on the insured/grantor and the percentage chance the insured would be alive was plotted. The information was summarized in the spreadsheet below.
As seen in the spreadsheet, it was projected no premium would have to be paid on any of the policies until the 8th year when Policy #2, the $2 million policy would have to be funded. All the policies would be nominally funded, allowing policy cash value to run to near zero before funding the policies with a minimal amount to keep the policies in force. The last column shows an approximation of the percentage chance the insured would still be alive. The LE report obtained showed that the insured was expected to have passed away by the end of the 9th year. While the LE report is not precise, it can provide guidance, and in this situation, it gave the trustee comfort that, at least for now, nothing should be done to any of the policies in the trust.
Using an LE report adds a data point to a prudent process. The key to mitigating liability is in the process, not the outcome. A great example of that is shown on page 127 of the TOLI Handbook, a 155-page guide for TOLI trustees and anyone dealing with life insurance.
As the federal estate tax laws changed in the last year, the use of new irrevocable life insurance trusts (ILITs) diminished, but the work required to administer existing ILITs went up along with the potential liability attached to the asset class. There are several reasons for this.
As a country, we are aging and the population of the average TOLI portfolio is aging too. For example, 25% of the insureds in policies we manage for TOLI trustees are above age 80, 6% are above age 90. These demographic realities create decision-making dilemmas with policies, especially those that might be underfunded. Life insurance costs rise with age and problems also increase with age. Longevity combined with poor policy performance makes policy management decisions more complex and the wrong decision can render a policy funded for a lifetime worthless or near worthless. For example, there are 72,000 Americans over the age of 100 (1) when most older policies mature. Unfortunately, the outcome at maturity is often not what you (and your clients) may expect. Many older policies mature for the cash value only, creating two issues. If the policy contract matures with significant cash value, the proceeds could be subject to taxation. Or worse – the policy matures with minimal cash value leaving the trust with little value. There is an adage with life insurance, “I want to die with a dollar of cash value in my policy.” Unfortunately, for some who live to maturity, a dollar is about all their beneficiaries get. Try explaining that to a beneficiary that has forgone thousands of dollars over the years by waiving their Crummey rights.
Products have not lived up to projections over the years and the problem is growing worse. The use of whole life, with its guarantees, has dropped while the use of universal life (UL) chassis products has increased. Some UL policies have death benefit guarantees, but most are cash value dependent policies driven by policy performance, which has lagged. And in the last few years, many carriers have raised the cost of insurance (COI) on policies, exacerbating the performance problem. Policies with well-known carriers like Transamerica, Lincoln National, AXA, Banner, Genworth and John Hancock, and others, have had carrying costs raised by 200 percent and more, quickly dissipating policy cash value and placing trustees in a precarious situation as policies deteriorate.
Even those UL policies with guarantees can have issues. According to an industry expert, (2), a major guaranteed UL carrier performed an audit of policies issued in the 4 years since it started selling the product and found that, in that short timeframe, 31% of the policies already had compromised death benefit guarantees with the major culprit being early payments. Yes, paying early actually damaged policy guarantees putting trustees at risk.
The greatest increase in liability and workload for TOLI trustees will accelerate in the coming years as grantors decide they no longer need their policy because of changes in the estate tax law or wish to alter the asset in the trust. The process behind analyzing options besides simply surrendering or lapsing a policy is beyond the capabilities of many trustees and we have come across trustees who have surrendered multi-million-dollar assets with no analysis – a recipe for legal disaster.
Policy replacements are flourishing and the number of bad replacements coming into ITM TwentyFirst has increased in the last year. One bad replacement (see Case Study #6, page 146 in the TOLI Handbook) would have robbed the TOLI trust of $900,000 leaving the trustee liable if we had not intervened. Another bad replacement caused a prospect of ours (now a client) to write a 5-figure check to make the client whole because the new policy was inferior to the one it replaced.
It’s a dangerous time out there for TOLI trustees. And it will not be improving but growing worse. In the coming weeks, we will be providing some guidance to TOLI trustees. In the meantime, for guidance now, you can download the free TOLI Handbook, a guide for trustees, regulators and fiduciaries dealing with TOLI policies. It is available at www.TOLIHandbook.com.
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.
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.)
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.)
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.
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.
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:
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