Informing Grantors About Their Policy Makes Good Business Sense

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

Life Insurance Settlement Association (LISA) Challenges Lincoln Enhanced Buyback Offer

Back in the spring, we reported on the Lincoln National “Enhanced Cash Surrender Value” offer the carrier began making to a select group of policyholders.  These unsolicited offers would allow policyholders to receive an amount higher than the current cash surrender value to return their policies to the carrier.

As we noted, the offers were similar to some made on mispriced variable annuities after the 2008-09 financial crisis.  Those annuities had guaranteed minimum income benefits that the carriers felt were too rich in the current investment climate.  The Lincoln offer, however, is the first enriched buyback offer we have seen for life insurance policies.

Life Insurance Settlement Association (LISA), a trade association that promotes the rights of policyholders selling their policies in the secondary market, is now challenging this enhanced offer.  In a letter addressed to the Commissioner of the Florida Office of Insurance Regulation, LISA, through its attorney, alleges that the enhanced cash value offer violates a “slew of consumer protection laws,” citing five separate Florida statutes, and accuses the carrier of “acting as a life settlement provider without the required license.”

According to the LISA letter, the offer was made on 5,300 Lincoln Life Guarantee SUL 2009 policies.  These survivorship policies, which pay out after the second insured dies, are often used in trust-owned life insurance (TOLI) trusts since estate taxes for a married couple are typically paid at the second death.

We oversee 81 policies that have received offers – so far.  While in both the offer letters and the FAQ brochure provided by Lincoln, the carrier notes that their “records indicate” the policyholder has “stopped making regular premium payments,” for a number of our policies, premiums have been paid to date, some each year since policy issue.  The carrier suggests that “missing premium payments can be an indication that your insurance needs may have changed” and asks the policyholder to “consider whether you still want or need the death benefit protection provided by this policy,” or whether the Lincoln enhanced offer “is more important to you than your need to leave a death benefit to your beneficiaries.”

LISA notes that in an attempt to “entice” policy owners to accept their offer Lincoln is using “many of the arguments made by life settlement providers in their marketing,” pressuring “the consumer to act” by providing the option for “a limited time only.”  According to the LISA letter, Lincoln seeks “to entice agents to solicit their clients” to take advantage of the offer “by holding out the possibility of additional commissions” if the client uses the proceeds to purchase a new Lincoln product, noting that “an internal replacement into any new policy or contract will be considered new business and agents will be compensated using the same rate schedule used for new premium.”

A life settlement also pays a commission to those who facilitate the transaction.  Whether a life settlement would be more beneficial for the policyholder is probably not contingent on commissions paid but the facts and circumstances around each policy, specifically the health of the policy and the insured.  Lincoln is offering to pay a premium of between 35% and 200% above the cash surrender value for the policies we manage, without having any knowledge of the insured’s current health. In a life settlement transaction, at least one life expectancy (LE) report is obtained, providing the investor with insight as to the health of the insured, which greatly affects the price offered.

Why would Lincoln do this?  In our portfolio of 81 policies, there is $292 million of death benefit.  Lincoln is offering an aggregate amount of $41 million to re-purchase the policies. The 81 policies have a total surrender value of $25 million, but without surrender charges, the cash values would be $31 million.  We have found that, in our portfolio, the average offer is slightly above the average premium paid. Lincoln is not paying much more than it has collected (and invested) since the policies were issued.  Lincoln is on record as saying that it is making the offer because for policies surrendered, they would “no longer be responsible for the death benefit on the policy.”  This would enable them to release “financial reserves and redeployment of the funds for a different use.”

The life insurance industry is struggling, and carriers are looking for alternative avenues to use their capital more profitably.  This will have repercussions, and in our next blog, we will discuss Voya’s decision to stop issuing life insurance and how it highlights changes in both the life insurance market in general and trust-owned life insurance (TOLI) in particular.

LISA is asking for the Florida Office of Insurance Regulation to investigate Lincoln’s Enhanced Cash Surrender Value Option, and to “take necessary enforcement action if, as we believe you will, you conclude that this program violates Florida law.”  As of today, none of our clients have taken Lincoln up on their offer, but almost all have until the end of March 2019 to do so.

We will report back with any updates.

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.

The TOLI Handbook – Chapter 16: Remediation, the Weak Link for Trustees

A TOLI trustee we work with received a request from a grantor tired of gifting to pay premium on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage.  The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured.

While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit).

Trustee choices in this case:

  1. Guaranteed $3.9 million of coverage with increasing cash value.
  2. Non-guaranteed $3 million of coverage with decreasing cash value.

 

While it seems easy to see the prudent decision is number 1, it was not easy to see at the time.  Why?  Because the trustee did not have all the information or the requisite skill to gather and analyze all the information.  In the decade we have been reviewing TOLI policies – including replacement options – this lack of knowledge and skill has been the weak link for trustees managing ILITs.

And this is a growing problem.  We cite 6 case studies in the TOLI Handbook, each with its challenges, each representing potential liability to the TOLI trustee if handled incorrectly.  And we could have added more real-life situations we have encountered.

If you are a TOLI trustee what do you do when:

  • You take on a portfolio of whole life policies with growing loans?
  • A grantor tells you to surrender their policy or allow it to lapse?
  • Grantors say they want to replace their variable universal life policy with a “more conservative” equity index universal life policy?

 

We guide you through these situations in the TOLI Handbook, a free 155-page PDF we believe represents the best single source of information available for managing TOLI trusts and life insurance.

With the changes in the federal estate tax exemption, you will be receiving more of these types of requests.  They will mean much more work, and more important, much more liability for you.

For a FREE copy, please 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

The TOLI Handbook – Chapter 10: Understanding Equity Index Universal Life

Equity index universal life (EIUL) is the hottest product in the permanent life insurance marketplace. The “star of the life insurance show” according to one published report (1) that is touted as providing the upside of the equities market without the risk of loss. The carriers accomplish this by crediting the EIUL policy with the positive returns of an index (often the S&P 500 – without dividends) subject to a cap (a non-guaranteed maximum credited rate) while limiting the downside with a floor (typically 0%) so policy returns cannot be negative (through policy cash value will still go down).

We were flooded with replacement requests after the 2008-09 market meltdown from grantors holding variable universal life (VUL) policies tied to the equity market that had suffered big losses who believed the EIUL policy was more conservative than their existing policy.

While the product has a place in estate planning it has been misunderstood with many policies designed with expectations that may not be met. As a TOLI trustee, this is an issue. If a policy does not perform as expected it will be your job to ask the grantor to gift more to the trust – not a welcome task.

There are several reasons that the policy may not perform as projected in a sales illustration.

  1. The credited rate assumed in the policy is too high: Sales illustrations for EIUL policies were often shown with assumed crediting rates approaching 8%. While an 8% S&P 500 average may seem realistic it’s probably not. The return does not include dividends, which has historically been a rather significant portion of the total return. And though the floor will limit the downside, the cap limits the upside. For example, over the last forty years the S&P 500 has had eight losing years, but in that time, it has returned greater than 10% in over half of the years, creating a drag on actual returns credited in policies with caps 10% or less.
  2. Illustration games: Interest bonuses and multipliers can inflate the returns in an illustration. AG 49, an industry guideline effectively limited the maximum crediting rate that could be a shown in policy illustrations to approximately 7% but did not limit the use of techniques that inflate illustrated returns in a policy such as bonuses and multipliers. For example, while a sales illustration may show a credited return of 6% at the top of the page, the fine print below may point out that the policy includes a 1.25% multiplier effectively increasing the crediting rate of the hypothetical illustration up to 7.5%. Understanding the policy illustration assumptions is crucial when reviewing these policies.
  3. Changes in the Non-Guaranteed Elements: Changes in the cap or other non-guaranteed elements can drastically change the policy performance. For example, suppose a policy is issued with a 10% cap, 0% floor, 100% participation rate and an assumption that the index will return 7%. According to an online calculator (2), at a 10% cap, the interest credited to the policy would be 5.39, but if the cap dropped to 8.5% and all else, including the return in the index, remained the same the interest credited would drop to 4.76%.

These are just some issues a TOLI trustee must review and comprehend before accepting an EIUL policy. To learn more about this product and the steps you should take before advising a client to purchase one, please refer to Chapter 10 in the TOLI Handbook, a free 155-page guide for TOLI trustees or anyone dealing with life insurance. To get a free copy, click here.

 

  1. Tuohy, Cyril. “IUL the Life Insurance Star of 2017 Sales.” Insurancenewsnet.com, 26 Dec. 2017, insurancenewsnet.com/.
  2. JH IUL Translator.” JH IUL Translator,” Iultranslate.com.