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.
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.
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
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.
Universal life policies
came into the market offering premium flexibility and transparency that was
unknown in whole life policies. However, universal life policies lacked one
thing those whole life policies had – death benefit guarantees. If you paid
your premium on a whole life policy, the policy death benefit was guaranteed to
universal life policies (current
assumption) were fixed investment products developed because interest rates
were lofty. The crediting rates assumed in sales illustrations were as high as
12%. This created attractive, low premium, high-cash value products with
assumptions that were doomed to fail – and they did.
The life insurance industry reacted, creating
a new product – guaranteed universal life, or GUL, which just like whole life,
guaranteed the death benefit. But with
GUL the policyholder loses one of the most popular features of a universal life
policy – premium flexibility. These policies have a set premium that must be
paid in full and on time, or the policy death benefit guarantee will be
shortened or lost.
One of the common problems trustees
rarely catch is when a GUL policy is purchased as a replacement, and the
required premium in the as-sold illustration includes 1035 Exchange money
coming over from the existing policy. For the policy to maintain its stated
guarantees, the 1035 Exchange amount coming over needs to equal or exceed the
expected amount. Often, during the underwriting process, the existing policy’s cash
value drops because of charges coming out of the policy, or in the case of a variable
policy, a drop in the equity markets. Our solution: when the exchange occurs,
verify with the carrier the exact amount coming over from the existing policy
and make any adjustments needed at that time. Also, with a variable policy,
place the cash value in the current policy in a money market or fixed account
while the underwriting occurs on the new policy so that a market correction
does not cause the cash value to swoon.
Once the GUL policy is in force, your administrators
will have to make sure the premium is paid in full and on time. This means that
gift notices must go out on time and if gifts are not received, following up aggressively,
making sure the grantor understands the consequences of a late gift. Note: This
should all be spelled out in the document you provided to the grantor for
signature when the policy is placed in the trust.
GUL payments are sometimes tricky. Over five years ago, we
pointed out that one carrier found that after only four years of selling the
product, 31% of the policies sold were already
off track. The reasons: 8% were because of insufficient premiums, 29%
because of skipped premiums, but the majority – 53% – were because of early
payments. That is right, 53% were off track because the premium was paid early. This particular carrier has different crediting
rates in their shadow accounts depending on funding levels and paying early resulted in a lower credited rate.
Other carriers have higher sales loads
in the early years, so paying early can
cause more of the premium to go to fees and charges with less to the policy –
again, creating an issue with the guarantees. This can be especially
troublesome in the first policy year when charges are highest. A while back, I
came across a report by a life insurance analysis firm that claimed you could
lose up to “30% of your original guarantee period” by paying the second year’s
premium in the first year. According to the report, in a little over half the
policies they tested, paying early did
not make a difference, but the others “on average lost anywhere from 10 to 20
years off the life of the guaranteed policy.” (1)
Guaranteed universal life takes the
market risk out of life insurance, but it adds additional risks that sit
squarely with the TOLI trustee. For all
GUL policies you take in you should understand all of the policy nuances – or hire
someone who does.
Premium, Sydney Presley, LifeTrends, October 29, 2018
When we first ventured into the trust-owned life insurance (TOLI) servicing business, our lead product was a policy tracking and trust administration system – what is known today as InsuranceIQ, and it was light years ahead of anything TOLI trustees had at their disposal. At the time, most trustees simply got an in-force ledger every couple of years, along with a rating update for the carrier, placed it all in the trust file and moved on. When asked about the condition of the policy, few could provide an in-depth answer. InsuranceIQ changed that. A proprietary rating system now alerted the trustee to issues with the policy and provided information on the (new) premium needed for under-performing policies to reach their goal. The InsuranceIQ annual report provided most trustees with their first systematized review of their portfolio.
Traditional ILIT support software solutions, even our own Standard InsuranceIQ Solution, as well as our competitors’ “policy review” products, do little to mitigate risk effectively. Granted, they can help minimize potential administrative miscues, and housing portfolio information in a centralized location is certainly a step up from past practices. But, you could argue that all you have done with a policy review is gather potentially liable policy information in a form that is easier to access. Annual policy reviews designed to “check the box” for audit and regulatory compliance purposes that were a viable option in the early 2000s to appease regulators do not solve policy problems or mitigate the liability associated with managing this unique asset. That is why many corporate trustees now realize handling the complexities of life insurance takes more than a policy review – it takes expertise and significant internal resources above and beyond software. Maintaining the required expertise in-house and dedicating the necessary resources internally, for an asset class that is revenue neutral at best, is nearly impossible.
Over the last few
years, there have been dramatic changes in the TOLI marketplace. Cost of
insurance increases from mainstream carriers like Transamerica, Voya, John
Hancock, Lincoln National, and others have more than doubled the carrying costs
in some policies. You may be able to show that in a policy review to your
client, but how will you deal with the policy?
have written about
new policy illustration schemes that take a 6.75% illustrated rate and turn it
into a 9% internal rate of return by adding bonuses and multipliers that are
not guaranteed. Your policy review may have projected a successful outcome, but
if it was based on faulty or misunderstood information, what good is it?
Unless you have experts on hand who can correctly analyze a
policy and deal with policy issues as they arise, you will not be able to
effectively maximize the value of the asset, which is your duty. You will only
be able to document that the problem occurred. Taking
the next step beyond policy review – remediation – is required, and it is what sets ITM
TwentyFirst apart from the policy review competition. Our Managed Solution
product provides trustees with life insurance experts who analyze and develop
succinct solutions to policy problems and document the trust file to help
mitigate your risk.
Our remediation team does not just deal with problem policies
but provides insight for any policy changes. Let’s say your client wants to
lower the death benefit because of estate tax law changes; does your staff have
a process in place that maximizes the value of the policy? If your client
wanted to surrender their policy because they believe they no longer need it,
does your staff have the capability to show that client the value of their
policy – potentially keeping that policy and trust in place? Our team does.
For many enlightened TOLI trustees, the Managed Solution
provides the perfect alternative. It allows them to raise client service levels
and to mitigate liability for a fixed price that is often less than the cost of
doing the work in-house.
Your best business decision in 2019 starts by contacting ITM TwentyFirst. Call John Barkhurst today at 319.504.1581, or email him at jbarkhurst@ITM21st.com to get started.
most important when determining the liability of a trustee’s actions?
Over the years, we have noticed that the knowledge of TOLI
trustees varies from trust company to trust company. After publishing the TOLI Handbook
in 2018, we thought we would “chunk it down” in 2019 with the TOLI Challenge—a
series of questions designed to test the knowledge of the typical TOLI trustee.
We will be publishing questions throughout the year and hope that you accept
the challenge and maybe learn something new throughout the year.
Our first question:
What is most important when determining the liability of a
Whether they follow the grantor’s instructions
Whether the policy performs as expected
Before we blurt out the correct answer, let’s walk through the
The first option is the outcome determines the liability, and
certainly, a negative result can draw the ire of the beneficiaries and initiate
an action against the trustee, but often, the adverse outcome is outside the
control of the trustee. If the outcome is because of direct negligence of the
trustee, there may be an opportunity for the beneficiaries to move ahead with
The second option is whether the trustee follows the grantor’s instructions.
If by grantors’ instructions we mean to follow the trust document, then this
answer has some validity. After all, a trustee needs to review the trust document
and then administer the trust according to the guidelines of that document. However,
if it means following the whims of the grantor, then certainly the answer is
no, as can be seen in Paradee v. Paradee.
The third option deals with policy performance, and if this is an
issue, then many trustees would be in trouble because in general, policies have
not performed well over the last ten years or more. In Nacchio v. David Weinstein and the
AYCO Company, we saw a fiduciary held liable for over $14M in a case that
centered around policy performance.
All the answers above could have some consideration, but we
believe the answer is the process. For the other options – each of which could
bring liability – a proper process could either alleviate the problem or negate
If a policy has a negative outcome, it is not necessarily the trustee’s
fault. The Uniform Prudent Investors Act (UPIA) speaks to this in Section 8 of the UPIA in reference to
prudent decision making as it deals with compliance, which it says is “determined
considering the facts and circumstances existing at the time of a trustee’s
decision or action and not by hindsight.” As long as the decision making at the
time was prudent, liability will be limited. How to ensure it is? Have a prudent
process that is followed and documented.
second choice, following the grantor’s
instructions, could be an issue, but not if you had a sound practice in-house
to follow the guidelines of the trust document in a prudent manner, and as part
of your administrative and decision-making process, you are not swayed by the
whims of the grantor. For some trustees, this has been an issue – after all,
the grantor pays the bills, but Section 5 of the UPIA is clear when it says a
trustee is required to “invest and manage the trust assets solely in the
interest of the beneficiaries.”
third choice, policy performance, could be problematic for those trustees who have
not closely tracked their portfolio and made their grantors aware of the
situation. In the Nacchio case, the policies brought in had rate of return
assumptions of over 10.5%, which were never attained. Again, the process
followed could alleviate the issues that could come from a policy that did not
live up to expectations. When the policy is taken in, make it your policy to
assume very conservative returns for the cash-value investment. Create a document
that shows the outcome (and additional costs) at a lower return and have it signed
by the grantor and made part of the trust file. As part of your prudent
process, review the policy annually, and if the policy is off track, provide
the grantor with a solution (typically, more premium).
So, the answer, we believe is the fourth choice: the process
followed is the most critical factor when determining the liability of a
trustee’s actions. This is not the first time we have said this, and it won’t
be the last. We firmly believe in the prudent process. It is the backbone of
our business model.
The outcome cannot be (completely) controlled, but the
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.
While the DOL fiduciary rule, which went into partial effect in June raises the bar for those advisors working with annuities and investments in retirement accounts, no corresponding federal regulation applies for life insurance sales in the trust-owned life insurance (TOLI) market.
New York state has the most stringent law about best standards for life insurance and annuity sales. The law, which will begin to take effect in August of 2019, exempts some types of life insurance transactions, including corporate-owned (COLI) or bank-owned (BOLI) life insurance and those dealing with the sale of life insurance in the secondary market (the state already has regulations dealing with life settlements). But the law provides strict guidelines when dealing with traditional life insurance sales to consumers, including TOLI sales.
The law requires any life insurance salesperson to “act in the best interest of the consumer” and any product recommendation must “be based on an evaluation of the relevant suitability information of the consumer” and reflect “the care, skill, prudence, and diligence that a prudent person acting in a like capacity… would use under the circumstances.”
In making any recommendation “only the interests of the consumer” can be considered and though no limitations are placed on compensation, the law requires that “compensation or other incentives permitted” should not “influence the recommendation.”
While a few other states, as well as some national insurance organizations are also mulling over similar regulations, today the TOLI trustee has an obligation to their customer that is much higher than a life insurance salesperson or advisor. In most instances a life insurance sale must only meet a suitability requirement, a low bar and this has created issues we at ITM TwentyFirst have seen firsthand – issues that could cause a TOLI trustee to write a check, or worse, wind up in court (and possibly write a bigger check).
In the past year, we had a prospect (who later became a client) write a high six-figure check to make a grantor whole for a policy replacement that occurred two years prior. The transaction, which we could not undo, put the trust in a worse position than the existing policy. The trustee, who largely because of that transaction later became a client under our Managed Solution program, had followed the advice of a local life insurance agent, a mistake on his part.
Policy replacements have become an area of increased liability for trustees. In the TOLI Handbook, available here as a free PDF download, we write about two replacement transactions. Either could have placed the trustee in hot water – and possibly a courtroom. One replacement, pushed hard by an agent who was also a good friend of the grantor would have replaced an existing policy in the trust with one with demonstrable costs four times as high over the lifetime of the policy, clearly violating Section 7 of the Uniform Prudent Investor Act (UPIA) dealing with “appropriate and reasonable” costs. In another replacement case, an agent advised a TOLI trustee to replace a portfolio of whole life contracts with a new equity index universal life policy that would have provided the trust with fewer guarantees and a death benefit worth $900 thousand less. The trustee has a duty to investigate any transaction, including all the options for the existing policy – in this case, the agent never reviewed any.
As a TOLI trustee, you have a fiduciary responsibility to ensure that every transaction – either a new policy sale or replacement is not only suitable for your client, but also in your client’s best interest. Until regulations change you will be sitting on the other side of the table from most life insurance salespeople.
A recent online survey about life insurance found that 33% of life insurance policy owners do not understand how their policy works. (1) I suspect that this number is probably low. Maybe the other 67% probably think they know how it does, but I imagine they could get a refresher lesson on how it actually does. Even if they do understand how it works, do they understand how a decade of low-interest rates and equity market volatility affected their policy?
TOLI trustees should be contacting grantors to explain to them just how their policy works. Doing so will provide the grantor with greater clarity about their policy and provide the trustee with a chance to deepen the client relationship, bringing benefits to both grantor and trustee.
For the grantor who has been dutifully paying premiums (and trust fees) for years, the discussion will reinforce the reasons for taking the policy out. Even though the changes in the federal estate tax may have greatly reduced the number of people subject to the tax, life insurance is still a worthwhile financial investment and that point can be driven home by the discussion. Just because the proceeds will not be gobbled up by taxes does not mean the proceeds are no longer as valuable – in fact, they are now more valuable since, for many, one hundred percent of the benefit will go to the beneficiaries, a plus.
For some policies, the last ten years of low-interest rates have been a drag on performance and now is the time to review those policies with your clients – when interest rates are ticking up and fixed investments (which most life insurance policies are) have a rosier future. Perhaps the premiums will have to be increased to keep the policy on track but the policy, if managed correctly, is still a valuable asset.
Many of your grantors are reassessing their financial and estate planning future, given the changes and market volatility of the last ten years. Once they are comfortable their life insurance policy is secure and valuable, you can move on to other subjects that may provide additional revenue for your firm.
For many of your clients, retirement income is a major concern. Some may feel they do not have enough assets to support their lifestyle, some simply have not put a retirement funding plan in place. In either situation, financial planning services can lead to additional opportunities for your firm. For example, clients worried that they may “run out of money” can be introduced to annuities as a funding vehicle for a portion of their assets to ensure a basic lifetime income.
Higher net worth clients, with well-funded retirements, still need your services. Introduce your investment options as you develop a relationship with them. These clients also have issues other than money you can solve. Most wealthy individuals struggle with how much to pass on to their children and how to structure the inheritance. You can bring great relief to ILIT clients by introducing other trust and estate planning services that can solve their problems.
Use the discussions with the grantors to open a dialogue with the beneficiaries of the ILIT that you control. Most TOLI trustees we speak with rank retaining the asset – the death benefit after the death of the insured – as one reason for handling ILITs, yet few put in the time and effort to cultivate the next generation of wealth. Why can’t the beneficiaries be clients now so that retaining the TOLI benefit in the future will be cemented?
There are many reasons for contacting grantors to explain the policy. For clients of ITM TwentyFirst, you have one of the best tools in the industry available to do just that. Our annual policy reports provide all of the information needed to have a fruitful discussion with your client and for clients of our Managed Solution, a remediation specialist is available for any questions or policy modeling that might be needed.
Open the lines of communication with your grantors, you will be glad you did.
1. 54% of Americans Own a Life Insurance Policy, But One-Third Not Exactly Sure How It Works, Mike Brown, September 19, 2018 lenedu.com