Finally, a Place for Orphan ILITs!

The last few years have been a tumultuous time in the life insurance trust business.  The prospect base is shrinking after the Tax Cuts and Jobs Act raised the federal estate tax exemption from $5.49M to $11.18M per person.  Today only 1 in 1,000 estates affected by the estate tax (1).  The asset class has become even more cumbersome to manage, as policy performance has suffered and sophisticated policies with more moving parts leave trustees with a greater chance for something to go wrong, just when the society around us seems to have become more litigious – especially in the life insurance space. Many trust-owned life insurance (TOLI) trustees are questioning the viability of their TOLI business model – and perhaps some should.  Especially those whose portfolio includes many orphan accounts – those grantors whose only business with the bank or trust company rests in a trust that generates minimal revenue, but a considerable liability.

The answer?  It’s a three-step process:

  1. Review all the ILITs in your portfolio and determine which represent significant other revenue for your firm. ILITs without additional revenue represent little more than a liability to most banks and trust companies.
  2. For those orphan ILITs with clients that have no other assets at your firm, contact Leon Wessels at Life Insurance Trust Company (LITC) to develop a game plan for removal of those ILITs. While the life insurance asset will be housed at LITC, any other revenue relationships that could be developed would remain with you.
  3. Review your options with the rest of your ILITs. If you are not now utilizing the Managed Solution through ITM TwentyFirst, consider utilizing that service which allows you to still house the ILIT, but outsource the administration of the trust and the tracking and management of the policy.  The Managed Solution option allows you to efficiently and economically raise the level of service to your most profitable clients.

The times have changed dramatically in the bank and trust space, but great reward awaits the business leaders who review their product line and seize growth opportunities while effectively managing or minimizing those areas that bring the least to the bottom line.

Outsourcing has always been a viable option in the right situation and today more than ever in the trust owned life insurance (TOLI) market outsourcing and trimming client lists will cause less liability and greater profits.

For more information on how you can increase profits while limiting your liability, contact Leon Wessels at 605.574.1703 or lwessels@lifeinsurancetrustco.com.

  1. Center on Budget and Policy Priorities

The TOLI Handbook – Chapter 15: Understanding Life Expectancy Reports

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.

ChartforBlog-8-15-2018

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.

To download your FREE PDF copy of the TOLI Handbook, go to www.TOLIHandbook.com.

TOLI Trustee Work Load and Liability Climbing as Use of ILITs Diminish

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.

 

  1. Worlds Centenarian Population Expected To Grow Eightfold By 2050, Renee Stepler, Pew Research Center, April 21, 2016, http://www.pewresearch.org/fact-tank/2016/04/21/worlds-centenarian-population-projected-to-grow-eightfold-by-2050/
  2. Bobby Samuelson, The Life Product Review, https://lifeproductreview.com

TOLI Trustees Can Gain Guidance From 401(k) Lawsuits (and the TOLI Handbook)

In the past, we have written about 401(k) lawsuits flourishing and what trust owned life insurance (TOLI) trustees can learn from them. This week, a research paper concerning 401(k) lawsuits landed on our desks that can provide guidance to trustees handling life insurance. The report published by the Center for Retirement Research at Boston College notes that “over 100 new 401(k) complaints were filed in 2016–2017 — the highest two-year total since 2008–2009” (1).

The number of TOLI lawsuits has not increased like the number of 401(k) lawsuits has … yet. Regulations around 401(k) plans have been in place much longer than those concerning TOLI trusts. The Employee Retirement Income Security Act of 1974, which governs 401(k) plans, is almost 45 years old, but lawsuits have only proliferated over the last ten years. In the TOLI world, the Uniform Prudent Investor Act and the Office of the Comptroller of the Currency’s Unique and Hard-to-Value Assets handbook are much more recent guides.

The guides mentioned above share one common characteristic that was pointed out in the research paper — they do not “spell out” specific directions for managing an asset. They all provide general guidance, but it is up to the trustee to take that guidance and develop a process to prudently manage the assets. ITM TwentyFirst has just published a free handbook that provides more specific direction.

The authors of the research paper cite three main areas of contention in the 401(k) world that can be applied to the TOLI world.

  1. Inappropriate Investment Choices: In the 401(k) world, this relates to options in the retirement plan. In the TOLI world, this could relate to the separate account investments in a variable policy or even a broader application — the choice of the policy type. Variable life investment options are chosen by the trustee, not the carrier, which layers in another trustee responsibility. (See Chapter 9 in the TOLI Handbook for guidance.) Moreover, the asset in a TOLI trust must match the trust’s temperament and goals as well as the grantor’s financial situation. (See Chapter 12 in the TOLI Handbook for guidance.)
  2. Excessive Fees: 401(k) investment fees are easy to see, but in the TOLI world, the costs within a policy can be much more opaque. We have witnessed situations in which trustees were ready to accept replacement policies that had internal costs that were 3–4 times more than the existing policy. Why? Because they had no process in place with which to review the new policy and instead relied on the word of the salesperson. Without a process in place, a trustee could easily be held liable. (See Case Study #5 starting on page 128 of the TOLI Handbook for guidance.)
  3. Self-Dealing: According to the Boston College research paper, self-dealing occurs when a fiduciary acts in “its own best interest rather than serving” its clients. In the TOLI world, we have had our own lawsuits in this area — one in which a major bank that had received a large commission on a policy in its trust fought back against a lawsuit by beneficiaries who charged that the trustee had “violated the prudent-investor rule” (see page 14 in the TOLI Handbook for more information on how), and another in which trustees were held liable for over one million dollars when the beneficiary charged that they had breached their fiduciary duties. (See page 17 in the TOLI Handbook for further explanation.)

Many pundits believe that the trustees of trust-owned life insurance policies will encounter increasing liability in the coming years. The well-informed trustee will be less likely to be among those facing litigation. The TOLI Handbook – available here – can help inform.

 

  1. George S. Mellman and Geoffrey T. Sanzenbacher, “401(k) Lawsuits: What Are the Causes and Consequences?” Center for Retirement Research at Boston College, May 2018.

 

ITM TwentyFirst Publishes Free Trust Owned Life Insurance (TOLI) Handbook

As a decade plus provider of services to the TOLI marketplace, ITM TwentyFirst has developed a reputation as the expert in the trust owned life insurance arena. A pioneer in the field with the introduction of a web based administration portal for TOLI trusts in 2002, ITM TwentyFirst became the first company to offer total outsourced TOLI administration and policy management in 2007. In 2017 its affiliated entity, Life Insurance Trust Company became the first trust company in the United states to focus exclusively on life insurance, offering trust companies the opportunity to off load the asset to a firm that would not compete in other areas.

Over the last year ITM TwentyFirst has developed a handbook for TOLI trustees and advisors dealing with life insurance, especially in a fiduciary capacity. The 17-chapter book was developed and written by in-house specialists to provide internal education for staff, but was adapted and is being released to the public as a free downloadable manual. ITM TwentyFirst has always championed peer education developing a robust internal program for team members, as well as ITM TwentyFirst University that offers free CE for the industry. The company blog has provided timely industry insight for almost 6 years.

The handbook is a practical reference guide for those who are aware of life insurance, but not necessarily expert. It provides an overview of the responsibilities of a TOLI trustee and the guidance to live up to them.

The TOLI Handbook includes many actual cases studies and anecdotes drawn from the day to day work of ITM TwentyFirst team members. It is being published as a live document and is expected that it will be updated periodically as it adapts to the changing marketplace and industry. We believe that it presently represents the best single source of information available for managing TOLI trusts and life insurance. To receive a free copy of the TOLI Handbook, go to http://www.tolihandbook.com./

The TOLI Handbook Chapter Listing:

Introduction

Chapter 1 – The Irrevocable Life Insurance Trust (ILIT)

Chapter 2 – The Responsibilities of a TOLI Trustee and Some Guidance

Chapter 3 – Developing a TOLI Administration System

Chapter 4 – An Introduction to Life Insurance

Chapter 5 – Whole Life Insurance – A Closer Look

Chapter 6 – The Mechanics of the Universal Life Chassis

Chapter 7 – Current Assumption Universal Life – A Closer Look

Chapter 8 – Guaranteed Universal Life – A Closer Look

Chapter 9 – Variable Universal Life – A Closer Look

Chapter 10 – Equity Index Universal Life – A Closer Look

Chapter 11 – Why Did the Cost of Insurance Increase in My Policy?

Chapter 12 – Selecting the Best Policy

Chapter 13 – Taxation of Life Insurance

Chapter 14 – Understanding Life Settlements

Chapter 15 – Understanding Life Expectancy Reports

Chapter 16 – Policy Remediation

Chapter 17 – Closing Thoughts

First John Hancock Cost of Insurance (COI) Increase Letters Arrive

In February of 2017 we reported John Hancock had placed limitations on inforce ledgers for certain Performance UL policies.  A year later, in February of this year, we wrote that The Life Settlements Report, a trade publication, reported that John Hancock had voluntarily notified the state of New York that it would be raising the cost of insurance (COI) on 1,700 Performance UL policies.

Today, our New York City office received the first official COI increase announcement from the carrier.  The letter, dated May 7th, noted that the carriers’ “expectation of future experience has changed” and for that policy, the cost increase would occur on the next policy anniversary date.

The carrier provided several “options to manage the increase,” including; increasing the premium to keep the current death benefit in force, reducing the death benefit to “keep the current premiums the same,” or maintaining both “current death benefit and premium payment,” though if that option were chosen, “your policy will not remain inforce as originally projected.”

The carrier also offered the option to surrender the policy, though they “strongly encourage” policy holders “to consider the value of your policy and the goals you established when you purchased it” before taking that course.

The carrier provided an 800 number to contact “dedicated service representatives” for assistance and “personalized information and illustrations specific to your policy,” and noted they are “committed to working with” policy holders to choose an option that “best meets their needs.”

We are not sure of the size of the COI increase. According to a John Hancock representative contacted by our New York City office, the amount of the increase will vary by policy.   The representative also noted that roughly 4,000 Performance UL policies were evaluated and approximately 1,400 will be affected by the increase, though we cannot officially verify that.

It appears that inforce illustrations for the policies affected will begin to flow in the next few weeks, and as they are received and analyzed we will report back on our findings.

Shared Characteristics of Long-Term Care and Life Insurance Cost Increases

Sally Wylie, a retiree living on an island in Maine, was stunned when her long-term care (LTC) policy premium almost doubled. According to the Wall Street Journal article that recounted her dilemma, the one-time learning specialist took on part-time work to help with the finances, and she and her husband cut back on expenses to afford the premium for the policy that was purchased to be their safety net (1).

Permanent life insurance has experienced similar, large cost increases. Because of articles we published in the last few years on this subject, we have received more than one hundred emails from consumers stung by the cost of insurance (COI) increase on their life policies. Some people, like Sally and her husband, scrimp in other areas to pay the increased policy costs. Others have simply dropped coverage, which I suspect many long-term care policyholders have also done.

The cost increase dilemma facing life and long-term care policyholders stems from the decade-long, historic low-interest rate environment. Insurance carriers take in premiums, invest them and (hopefully) generate enough Moodysinvestment income to pay out future benefits and still make a profit. The general accounts of most insurers are invested primarily in high-grade corporate bonds. As the chart to the right, which shows the bond yield for Moody’s Seasoned Aaa Corporate Bonds, points out, bond rates have been slipping generally downward for the last 35 years. And since the market crash of ‘08-’09, interest rates have dropped to never-before-seen lows.

John Hancock, the insurer of the federal government’s employee long-term care program, raised premiums dramatically after interest rates that were expected to rise after securing the government contract in 2009 instead dropped by about 33% (2).

Current assumption universal life insurance carriers profit from what is called the interest rate spread. They invest at 6%, credit the policy 4% and keep 2% as “profit.” One carrier, among the first to raise COI rates, was contractually obligated to credit their policies 5.5%, even while their investment earnings were less than 5%. No profit there.

Most LTC and life insurance policies experiencing the cost increase are older policies written in the ‘high’ interest years of the ‘80s and ‘90s, another characteristic these policy increases share. They both impact older aged policy holders who have paid premiums for 20 or 30 years. Many retirees, who have reduced income due to low interest rates in conservative investments, now face higher costs driven by those same low interest rates. And for most older life and LTC policy holders, there is no alternative. They are typically too old or unhealthy to obtain more economical coverage.

Another similarity is that carriers are providing both life and LTC policyholders, as a principal option, the ability to maintain the same premium cost by lowering the benefit that would be paid, reducing carrier liability while still retaining their cash flow. In every life insurance COI increase notice we have received, reduction of death benefit to retain current carrying cost is proposed as a policyholder choice. And LTC carriers are leading with the same benefit-reduction option.

Many policyholders—both LTC and life—are simply abandoning their policies after years of premium payments, potentially risking their retirement security. A recent article in the Wall Street Journal lamented the fact that use of private retirement insurance products is dropping, with the burden being shifted to public plans (3). The needs of a widow whose husband dies without life insurance or a couple incurring large LTC bills without resources will shift to and drain the public system going forward.

As the article pointed out, “retirement security isn’t just about having a nest egg, but…also about having options for turning that saving into security.” For some who have seen the costs of their life insurance and LTC policies rise, some of their retirement security may be slipping away.

While we focus on life insurance, the ITM TwentyFirst University is offering a session on long-term care insurance with expert Kim Natovitz on Tuesday, April 24 at 2 p.m. Eastern Time. The session provides one hour of free continuing education for Certified Financial Planners and Certified Trust and Financial Advisors. To sign up, click here.

 

  1. “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice.” Leslie Scism, Wall Street Journal, January 17, 2017.
  2. “Another Big Long-Term Care Insurance Premium Hike.” Howard Gleckman, Forbes Magazine, August 1, 2016.
  3. “Retirement Insurance Products Are Disappearing. And That’s Dangerous.” Benjamin Harris, Wall Street Journal, April 13, 2018.