Take the TOLI Challenge: Can you answer this?

What is 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 trustee’s actions?

  1. The outcome
  2. Whether they follow the grantor’s instructions
  3. Whether the policy performs as expected
  4. The process

Before we blurt out the correct answer, let’s walk through the options.

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 their claim.

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 the liability.

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.

The 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.”

The 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 process can.

The Big Four Carriers Announce Their Dividends for 2019

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 downward.  

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
  • Mass Mutual: Will pay out $1.72 billion, up from $1.6 billion in 2018
  • Guardian Life: Will pay out $978 million, up from $911 million in 2018
  • New York Life: $1.8 billion, up from $1.78 billion in 2018

All 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
  • Mass Mutual: Stays at 6.4%, as in 2018
  • Guardian Life: Stays at 5.85% where it has been since 2017
  • 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.

Best Interest Standards for Life Insurance Would Be a TOLI Trustee’s Best Friend

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. 

Remember that.

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.

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.