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

Carrier Offers Life Policy Buyback – Another Trustee Decision Dilemma

Lincoln National is offering some policy holders the opportunity to receive an “Enhanced Cash Surrender Value” if they surrender their life insurance policies within a specific time frame.  We began to receive letters from the carrier a few weeks back, along with a Frequently Asked Questions (FAQ) brochure explaining the offer.

The offer is not unlike offers extended to variable annuity policy holders after the 2008-09 financial crisis. At that time, holders of variable annuities with guaranteed minimum income benefits (GMIB), typically in the 6-7% range, were offered additional incentives over and above their annuity’s value to surrender the contracts.   Those offers continue today with two carriers in the last few months reportedly “enticing” consumers to surrender their annuity “in exchange for some incentive such as a cash lump sum or another product from the insurer.” In fact, variable annuity buyout offers have occurred “among at least one or two carriers every year for the past four to five years.” (1)

According to a report by Moody’s, “companies selling VA’s with guarantees misestimated and underpriced” the product. The mistake “forced insurers to take significant, unexpected earnings charges and write-downs.” (2)

Lincoln’s offer is the first enriched buyback offer we have seen for life insurance policies. Some policies offer a contractual return of premium or enhanced value to surrender a policy at specified points in the future, but we have never received an unsolicited offer.

According to information from the carrier’s FAQ, the offer is being extended to those policy holders who have “stopped making regular payments” on their policy, and it is determined by a formula based on policy “cash surrender value, the length of time…[the]policy would remain active without future premium payments, and an actuarial calculation incorporating mortality and interest assumptions.”

Like carriers offering variable annuity buybacks, Lincoln will be helped by releasing reserves tied to the policies. According to the FAQ, “Lincoln must hold financial reserves in accordance with statutory and accounting regulations.” If a policy owner surrenders the policy, “Lincoln would no longer be responsible for the death benefit on the policy, allowing the release of these financial reserves and redeployment of the funds for a different use. This option could be mutually beneficial to both you and Lincoln.”

So, does it even make sense to surrender a life insurance policy – even if receiving an enhanced value? It depends on specific facts and circumstances, like all policy decisions. For these policies, no out-of-pocket premium is being paid. How long will the policy last without additional premium costs? What is the health of the insured? Will the policy last past the life expectancy of the insured without additional cash contributions? If not, how much more cash would have to be put in for the policy to run to life expectancy? Should a life expectancy report be obtained to provide another data point? These are some of the questions that must be asked before a decision is made. Lincoln believes that buying the policy back for an enhanced value makes economic sense for them. If you are a trustee, you will have to decide whether it makes sense for the trust and document the prudent decision-making process to reach your conclusion. It is all part of a trustee’s job.

 

  1. Insurers Still Grappling with Costly Variable-Annuity Promises, April 13, 2018, Greg Iacurci, http://www.investmentnews.com
  2. Moody’s Investors Service, Unpredictable Policyholder Behavior Challenges US Life Insurers’ Variable Annuity Business, Global Credit Research, June 24, 2013

New Transamerica Cost of Insurance Increase Is One of the Largest Yet

In the summer of 2017 we posted a blog about another Transamerica cost of insurance (COI) rate increase affecting Ultra 115 and TransSurvivorship products purchased in 1998-99. We anticipated that the increases would be around 58%—a hefty raise. What we are seeing now could easily surpass that.

We are now beginning to receive notices of monthly deduction rate increases for some policies. Some of the policies are hit with a level 47% increase. Others, according to the notices will increase 39% on the next anniversary date, then in addition, the carrier anticipates increasing the COI by that same amount (39%) the next year and the year after. The increases are “compound” and over-and-above the “customary increases associated with age.” After the three-year period the increase percentage remains level.

A three-year compounded annual 39% increase is dramatic, and the carrier admits the increase “may be a significant consideration” for the policyholder, while laying out the typical policy holder options: retaining the current death benefit and paying the higher carrying cost, reducing the death benefit to lower the cost, surrendering the policy for cash value or reaching out to the carrier for other options. In the past we have found that some Transamerica UL contracts do offer a reduced paid up whole life policy for some policy holders.

Transamerica is increasing the rates based on “current expectations” about “future costs,” and though “future costs of providing coverage are subject to change over time,” they believe that “the second and third rate increases specified . . . are necessary.”

What does an increase like that look like? I asked our team in New York City to look at an illustration for one of the policies affected by the increase.

First, an explanation. Carrier COI charges are computed on a per thousand basis on the net amount at risk, defined as the difference between the death benefit and the cash value of the policy. For example, if a level death benefit policy has a benefit of $1 million and a cash value of $200,000, COI is only charged on $800,000 ($1 million minus $200,000). Why? Because if you die, you do not get the cash value—the carrier keeps it, you get the death benefit only. Therefore, their risk is the difference between the two.

Note: Some policies can be designed with an increasing, not level, death benefit, which increases the amount your heirs receive (and the cost of the policy).

Our NYC team provided a cost increase analysis for a policy in our portfolio. As expected, the cost increase in the first year was 39%, from $5.56 perCOI thousand dollars net amount at risk per month to $7.73. Assuming a policy had net amount at risk of $800,000, as above, the pre-COI increase monthly charge in the next year (year 1) would be $4,448 ($5.56 x $800,000 / 1,000). Make sense?

After the COI increase, the monthly charge would be $6,183 ($7.73 x $800,000 / 1,000), the 39% jump.

Skip down to the third year, which assumes the compounded 39% increase each year. The pre-COI monthly charge would have been $5,642, but after three years of compounded increases, the monthly deduction charge rises to $15,161, a 169% increase. In this scenario, the approximate annual carrying cost for the policy go from $67k to $182k.

From the fourth year on the percentage increase remains a level 168.72% over the previous rates. The carrying costs above are not the exact numbers that would occur—they could get worse, if the policy’s cash value drops (and the net amount at risk increases). These are some of the largest cost increases we have seen to date from any carrier.

While we hoped the COI increases would slow down or even stop with interest rates rising, this latest increase tells us that may not be the case.

Special thanks to Frank Tomasello and Mike Irey in our NYC office for their contribution to this posting.  

3 Reasons to Move Your ILITs to Life Insurance Trust Company

Recently we posted a blog listing the top three reasons to outsource your life insurance trust administration. All three reasons made sense, but for some TOLI trustees, the most logical tactic may be to simply divest of this asset.

Let’s face it – the TOLI market is not growing; in fact, it is stagnant. Some experts estimate your prospects number only one in every 1,000 estates (1), and the prospect pool is shrinking. Also, the liability for this asset is increasing – litigation is up, and policy management is increasingly difficult.

And because of the changing estate tax situation, you will see an increasing number of clients asking you what to do with their policies – hence, a heavier workload for you.

Until now, the alternatives have not been attractive, but with the introduction of Life Insurance Trust Company you now have a viable option. Here are three good reasons to consider Life Insurance Trust Company:

  1. Rid yourself of the asset, not the client. For many TOLI trustees, the administration of the ILIT is a grudging accommodation to valued, high-net-worth clients. You were forced to keep the ILIT in-house to keep the client – but no more. With Life Insurance Trust Company, you can push the burden of the ILIT to us and keep your relationship with your client. We will partner with you to make sure that the transition is smooth, and the service levels are kept to your high standards – we are the experts in this asset class. And we will provide your financial advisors with the reports needed to keep them abreast of the asset. For those of you with “stand-alone” ILITs who would like to purge those from your portfolio, we can accommodate you – for all or a select few.
  2. We do not compete. Until now your alternatives for successor trustee were your competitors. Not any more – we are your partner. Our goal is to be the preeminent trustee in just one asset class – life insurance.  We do not have eyes for your clients’ other assets – those remain yours alone to manage. And by moving your ILITs to us, you will free up additional resources that can be directed to other, more profitable asset classes.
  3. We do the heavy lifting, you get the benefit – the asset to manage. While we will take over the management responsibilities of the life insurance trust, because you will still retain the relationship with the clients (and beneficiaries), you can be rewarded when the tax-free policy proceeds are eventually paid.  Your relationship with us will create the perfect win/win scenario, alleviating the burden while maximizing the benefit to you.

In today’s competitive and rapidly changing trust marketplace, there are few ideas that make a real difference. This may be one of them.

Find out how easy it can be by contacting Leon Wessels at 605.574.1703 or lwessels@lifeinsurancetrustco.com.

 

  1. Center on Budget and Policy Priorities, https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

3 Reasons to Outsource Your TOLI Trusts

Currently in the trust-owned life insurance (TOLI) world, we have sailed into a perfect storm of issues that make outsourcing your TOLI trusts more compelling than ever. There are plenty of articles on the varied reasons for outsourcing. And all, or at least the majority, of them are valid. Here are three stand-out reasons to outsource:

  1. The TOLI market is not growing, so why allocate resources? While life insurance trusts can serve many purposes, most trusts were set up to pay federal estate taxes. In 2017, it was estimated that only two in every 1,000 estates would be affected by federal estate taxes, and that was before the Tax Cuts and Jobs Act more than doubled the estate tax exemption.  Now, only one in every 1,000 estates will be affected (1). Your prospect pool has shrunk dramatically, so why designate capital, human or otherwise, to a business line that is, at best, stagnant? By outsourcing, you can free up internal resources for other, much more profitable, services.
  2. Your liability and workload will increase. Take it from someone who manages thousands of policies – they are getting harder to handle. A decade of historically low interest rates, a volatile equity market and a barrage of increasingly sophisticated products have combined to make the task of maximizing the value of a policy harder than ever. Because of the changes in estate tax laws, the number of grantors that will be asking you what they should do with their policies will be increasing – dramatically. And your fiduciary duty will still be to maximize the asset for the beneficiary. Will you want to spend the time to analyze all the options? Will you even know how? By outscoring to experts, this will no longer be an issue for you.
  3. You will know your costs and even lower your costs. Most trustees handling life insurance trusts are unaware of all of the expenses incurred. By outsourcing the servicing of this asset, you will be able to quantify your costs. And in most instances, the cost of outsourcing is less than keeping the task in-house. The economy of scale of managing thousands of trusts brings the cost per trust down to an affordable figure, one of the great advantages an outsource firm has, especially dealing with a cumbersome asset like life insurance. Knowing your exact costs, and potentially lowering them, may be the most persuasive reason to outsource in this competitive world.

Those firms that have made the jump to TOLI outsourcing have found the administration of their irrevocable life insurance trusts immediately less burdensome, and their level of service to clients dramatically increased. And the economics of the change made logical business sense.

For a personalized analysis, contact John Barkhurst at jbarkhurst@itm21st.com or call 319.553.6229.

  1. Center on Budget and Policy Priorities, https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax

 

 

NCOIL Tables Model Legislation Efforts to Deal with Cost of Insurance Increases in Life Insurance

NCOIL, the National Council of Insurance Legislators, met in Atlanta last weekend to discuss, among other things, “legislative solutions to unjustified premium increases (1).”

NCOIL is an organization made up of state legislators interested in insurance and financial matters, many of whom serve on related committees in their home states. The goal of the organization is to inform state legislators by creating a venue for interaction and education across state lines. The organization meets three times a year in open sessions that allow the legislators to hear from consumers, industry executives, and regulators.

The organization develops model laws that can be adopted on a state-by-state basis, and part of its published goal is to “preserve the state jurisdiction over insurance” and “speak out on Congressional initiatives that attempt to encroach upon state primacy in overseeing insurance.” The organization provides a needed open setting for the interaction of ideas designed to “improve the quality of insurance regulation (2).”

In its November 2017 meeting, Assemblymember Pamela Hunter of New York, brought up Insurance Regulation 210, a New York regulation we wrote about back in September of 2017. The regulation requires carriers raising expenses or cost of insurance in life and annuity policies to notify the New York State Department of Financial Services at least 120 days prior to “an adverse change in non-guaranteed elements” and to notify consumers within 60 days (3).   The leadership of NCOIL decided to continue the conversation Hunter started at their spring meeting, and on March 3rd, the Life Insurance & Financial Planning Committee of NCOIL met.

Winter storm Riley kept Ms. Hunter from attending the session, which was chaired by Representative Deborah Ferguson, who serves on the House Insurance and Commerce Committee in her home state of Arkansas.

The session opened with a statement by Darwin Bayston of The Life Settlement Association who pointed out there are 142 million life insurance policies in force with $12.3 trillion of death benefit, and stated that the current cost of insurance increases are harming many consumers. Darwin focused on the older population of insureds who had paid premiums for many years only to find that cost increases now made their policies unaffordable.

In my testimony I went over two of the many cases that we have reviewed for trustees at ITM TwentyFirst, where well over $400 million of trust owned life insurance (TOLI) death benefit administered on our Managed Service platform has been affected by the cost increases. I highlighted the problem of trustees, who have a fiduciary responsibility to maximize the asset in the trust, being forced to make decisions that deliver much less benefit to the trust than was expected. I also reviewed the many comments I had received from the public, including advisors who expressed dismay that their clients were subject to cost increases of 150 to 200 percent and consumers who cancelled policies because of COI increases and felt they had been “scammed” – their words, not mine.

Steven Sklaver, an attorney at Susman Godfrey LLP spoke next. Sklaver currently has multiple cases filed against carriers who have raised COI on policies and was “handcuffed” in his presentation as a result. However, he did contrast what is occurring in New York state versus the rest of the country, because of the New York regulation, by calling attention to a situation where a carrier who raised rates elsewhere decided not to raise rates in New York. In his testimony, he questioned whether the carriers could be raising rates across an entire class, as required, if NY state insureds were left out. He also pointed out an issue we have seen at ITM TwentyFirst – carriers not providing in force illustrations on policies in the grace period, a major burden for those of us attempting to help policyholders manage a distressed policy.

Kate Kiernan, Vice President, Chief Counsel and Deputy at the American Council of Life Insurers, spoke for the council, expressing their belief that there was no need for any new regulations concerning cost of insurance increases, either in New York or any other states.

Members of the committee had several inquiries. Representative George Keiser from North Dakota asked Mr. Sklaver several pointed questions, and disputed Steven’s assertion that the carriers were not raising rates across an entire class as required, if New York were left out of the increases.

The chairwoman, Representative Deborah Ferguson, asked me if there was anything in a sales illustration that might alert a consumer to a cost of insurance increase in the future. I informed her that the illustration is not the contract, and in fact, a poor tool to explain the policy. Though the illustration has language that indicates all assumptions could change, there is nothing in the illustration that can predict future changes in the policy.

Senator Bob Hackett from Ohio, a veteran of the financial services industry, opined that cost of insurance increases center more around tracking the policy with in force ledgers than the sales illustration, noting that he reviews the in force ledgers with his clients.  I agreed, but explained that though the cost of insurance in a policy will increase as we age, the cost of insurance increases that were the topic of discussion were beyond the natural rise, and resulted in carrying costs on policies to double or even triple overnight.

Our session, the first of the day, was brought to a halt by the vice chairman, Representative Joe Hoppe of Minnesota, who stated that he thought they should wait to see how it would “play out” in the court system before making the decision to move ahead. With a tap of the gavel, Ms. Ferguson brought the meeting to an end with the committee agreeing to not move forward to develop a model act – at least not now.

We have written often in the past about the cost of insurance increases we have seen in life insurance, including at least one article outlining some possible causes. Over the next year or so as the courts work through the various cases brought against the carriers and market interest rates adjust from the abnormally low rates of the last decade, the story will evolve. We will continue to follow up.

 

  1. NCOIL to Discuss Problems Facing Life Insurance Premium Increases, NCOIL News Release, January 23, 2018
  2. NCOIL website, http://ncoil.org/history-purpose/
  3. NY State Department of Financial Services, 11 NYCRR 48, (Insurance Regulation 210)

TRUSTEE ALERT- Why We Started An Affiliated Trust Owned Life Insurance (TOLI) Trust Company

On November 21, 2017, ITM TwentyFirst received a South Dakota charter for an affiliated trust company, the Life Insurance Trust Company, the first trust company focused solely on life insurance trusts.  On December 22, 2017 President Trump signed into law The Tax Cuts and Jobs Act with sweeping tax changes that included a doubling of the federal estate tax exemption amount to just over $11 million, lowering the number of estates affected annually by the federal estate tax from 5,000 to 1,700, less than 0.1 percent of all deaths (1).  Yet, we are extremely bullish about the prospects for our affiliated company.

The federal estate tax is fluid. It has been repealed four times only to reappear again.  If less than 100,000 voters had changed their votes in the last presidential election we could be looking at a $3.5 million exemption and a top estate tax rate of 65% (2).  News reports focused on the $1.7 trillion the tax bill will add to the federal deficit (3), but this is on top of the current $20 trillion dollars in debt ($170,000 per taxpayer) (4), and the additional $10 trillion that was already projected to be added to the debt over the next 10 years (5).

That much debt should raise interest costs. Interestingly, since 2008, while $8.4 trillion was added to the federal government debt, federal net interest costs incurred were near the lowest levels in 50 years (6).  That is going to change as the historically low interest rates rise.  It is projected that net interest costs will more than double in real terms and as a share of the economy over the next decade (7).  More government revenue will be needed, and if the political climate changes, the estate tax will be a target.  “We think there will be times when Congress is looking for new revenue sources, and this is a fairly easy one,” said one executive with a group that is a proponent of the estate tax (8).

But even if the political climate and federal estate tax situation does not deviate from the current, post Tax Cuts and Jobs Act climate, our affiliated trust company is still primed for success.

Life insurance, is at best, a cumbersome asset.  And ramping up internal resources – human and capital – to successfully manage an asset fraught with liability is a tougher business decision for financial institutions to make these days.  Some are looking for an opportunity to offload their life insurance trusts to a firm that will be a partner, not a competitor, and that is the business model that has been created at the Life Insurance Trust Company.  Managing life insurance trusts well without interest in the other assets a client may have, creates the perfect win/win scenario.  In some situations, a firm may wish to offload only those trusts with grantors that have no other relationship with the institution, so called orphan or stand-alone accounts.  The new company stands ready to accept only those trusts, leaving a more profitable ILIT business line.  For each situation, a tailored approach can be created.

Compliance managers at accounting and law firms whose members and partners have accepted the TOLI trustee role for clients are beginning to understand that the unchecked liability this creates is simply unacceptable with an asset such as life insurance.  A specialized trust company with robust individual and portfolio reporting provides a built-in tracking mechanism found nowhere else.

Financial and life insurance advisors looking for a home for life insurance trusts created over the years will find the advantages of this new trust company hard to pass up.  The life insurance experts servicing the Life Insurance Trust Company are advisor-friendly, and though the trust company bears a fiduciary duty solely to the beneficiary, its professionals understand that the success of the policy comes partly from working with the advisors in the field.  Another plus – advisors are provided with one of the most complete annual policy reviews available anywhere, alleviating them of this back-office expense, a welcome benefit for those advisors looking to downsize or reduce office expenses.

Life insurance trusts have many benefits besides tax advantages, including protection from creditors and the ability to control the passing of wealth to beneficiaries, important in those situations where spendthrift, mental illness or addiction issues may play a role.  But in the last few years, we have seen that the management of this asset may best be handled by an organization with specialized resources and talents.

For those who would like to learn more about the Life Insurance Trust Company, a special one hour webinar is planned for Tuesday, January 30th, 2018 at 2PM eastern.  To register, click here.

For more information about this new trust company, contact Leon Wessels, Director of Business Development, at 605.574.1703, or lwessels@lifeinsurancetrustco.com

 

 

  1. Howard Glickman, Tax Policy Center, December 6, 2017, http://www.taxpolicycenter.org/taxvox/only-1700-estates-would-owe-estate-tax-2018-under-tcja
  2. While President Trump won 290 electoral college votes, 70 electoral college votes were won by less than 1.5% of the vote, including; Wisconsin (10), Pennsylvania (2), Florida (29) and Minnesota (10). Michigan (16) and Vermont (3) were won by less than .4% of the vote.  Clinton proposed a $3.5 million estate tax exemption and a top tax rate of 65%, Hillary Clinton Proposes 65% Top Rate for Estate Tax, Wall Street Journal, Richard Rubin, September 22, 2016
  3. Congressional Budget Office, Estimated Deficits and Debt Under the Chairman’s Amendment in the Nature of a substitute to H.R. 1, the Tax Cuts and Jobs Act, https://www.cbo.gov/publication/53297
  4. org, amount as of 1/24/2018
  5. CBO’s January 2017 Budget and Economic Outlook, Committee for a Responsible Federal Budget, January 24, 2017
  6. Policy Basics: Deficits, Debt, and Interest, Center on Budget and Policy Priorities, August 29, 2017, https://www.cbpp.org/research/federal-budget/policy-basics-deficits-debt-and-interest
  7. Congressional Budget Office, The 2016 Long-Term Budget Outlook, July 12, 2016
  8. Death Tax Repeal In 2017?, Ashley Ebeling, Forbes, June 6, 2013.