Take the TOLI Challenge: Only Permanent Life Insurance Policies Can Be Sold, True or False?

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.

Only 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.

Most 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 this opportunity.  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.

Trustee Alert: Managing Guaranteed Universal Life Policies

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 be paid.

The earliest 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.  

  1. Early Premium, Sydney Presley, LifeTrends, October 29, 2018

Prudently Managing ILITs – It Is More Than Just Tracking a Policy

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 reviewit 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?

We 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.

Rating Agency Upgrade for Life Insurance Industry Bodes Well for TOLI Trustees

Less than a year ago we reported that AM Best published a special report in which the rating firm issued a negative outlook on the US life insurance and annuity market.  They cited the continuing low interest rates, a flattening yield curve, regulations, potential for market corrections and the need for innovation as the major reasons for the outlook.  The report highlighted one potentially harmful issue – an abrupt increase in interest rates noting that insurance carriers prefer a slow increase to rates that “allow them to adjust their credited rates on liabilities and their asset portfolios to optimize returns.”

Recently the agency upgraded their life and annuity outlook from negative to stable for 2019, mentioning the moderately increasing interest rates as one of the positive factors.  Other positive indicators were strong sales in the annuity segment which had been down, as well as strong sales in indexed universal life. 

According to the AM Best report, lower effective tax rates going forward will be a boon to the overall profitability of the carriers, as will the general increase in carrier investment returns.

It is this increase in carrier returns that will be most beneficial to TOLI trustees.  Policy performance issues have been centered on the downward slope of fixed interest rates over the last two decades which was exacerbated by the economic crunch of 2008-09 and the Federal Reserve System’s actions that drove federal funds rates to near zero over the last 10 years. Most life insurance products are driven by fixed investments and the last two decades have not been kind to these financial vehicles.  Dividends in whole life policies swooned and crediting rates in many current assumption universal life policies dropped to their guaranteed lows. Some carriers looking to offset the loss in investment income raised the cost of insurance in their products, creating carrying cost increases of 200% or more and making some policies unaffordable for policyholders, many who could no longer purchase newer, more affordable policies. 

This AM Best report provides those of us who manage life insurance for a living with the hopeful prospect that policy performance will improve going forward taking a bit of the pressure off of managing a life insurance portfolio.

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.

Another Good Year at Heckerling

The first thing you notice after entering the Orlando World Center Marriott Resort and Convention Center is the lineup of vendor booths set up in the hallway – the overflow from the cavernous convention center hall.  This year’s Heckerling Institute on Estate Planning appears to have been a great success.  The number of attorneys attending was up, and those putting on the session attracted more sponsors and exhibitors than ever. 

As we mentioned in one of our last posts, we have been coming to these sessions for over a decade and this year’s meeting was not only well attended but generated more attention than ever for ITM TwentyFirst services.  Not only was the traffic up at our booth, but so was the interest, especially from those attorneys who were finding out for the first time that there was a trust company that specializes in life insurance.  Many attorneys writing ILITs reluctantly become the trustee of the policy.  If not, they tend to lose track of the policy (and maybe the client).  Working with our trust company (https://lifeinsurancetrustco.com/) can alleviate an attorney-trustee of the fiduciary burden of handling the ILIT and still enable them to stay in contact with the client by receiving comprehensive updates on the policy and the trust that can be part of a billable year-end review.  This is one reason that the attorneys that stopped by are viewing the Life Insurance Trust Company as a partner in their clients’ ILIT success.  According to Leon Wessels, a TOLI veteran and the head of corporate development at the new trust company, the meeting was very gratifying. “The level of interest in the new trust company among lawyers attending Heckerling this year was much higher than even I expected. I was pleased that the attorneys I spoke with understood how we could benefit their practice. The fact that they are truly beginning to see our value was very rewarding for me.”

John Barkhurst, who heads up business development for our TOLI trust services shared Leon’s enthusiasm for this year’s reception.  “What attorneys and advisors are beginning to understand is that there is more to managing a policy than just tracking it. Our outsourcing service is much more than just a policy review. We have in-house life insurance experts who provide an analysis of any policy issues free from conflicts and deliver to the trustee what is most important – a prudent solution laid out in a concise report.  And since our solutions follow prudent practices that are documented and made part of the trust file, we can lower trustee risk.  Lawyers understand how valuable this can be should litigation about a policy ever occur.  That is one reason they are very receptive to the comprehensive services ITM TwentyFirst provides.” 

Heckerling always marks the beginning of the new year for us, and we are thankful this year the importance of our work has resonated and grown even stronger in the legal community. 

Join ITM TwentyFirst at the 53rd Annual Heckerling Institute of Estate Planning

We have three office locations across the United States, and as I write this, none will see 40 degrees as their high-temperature today, so it is no wonder we are looking forward to heading south to the sunshine of Orlando, Florida, for this year’s Heckerling Institute of Estate Planning session from January 14-18.  However, it is much more than that.

It has been about 15 years since we attended our first Heckerling session. Back then, we were pioneers in the trust-owned life insurance (TOLI) policy review space. Before we came to market, trustees had few resources, except local life insurance agents, to help review their portfolio. Our service solved a significant problem: for the first time, TOLI trustees could receive a non-biased policy review (our Standard Solution). We followed that up with a full-service outsource offering (our Managed Solution) that provided dedicated experts in trust administration and policy management to not only track the policy but to handle all back-office administration and equally important, to solve policy issues. We helped mitigate liability by creating the trust file documentation necessary to prove a prudent process occurred.

Last year, again taking a pioneering approach, we created the first trust company focused on life insurance (Life Insurance Trust Company) after clients approached us looking for a trustee who would take some or all their ILITs and not compete with them on their other assets.

Over the years, ITM TwentyFirst has grown by listening to clients. Going to Heckerling is one way we get to do that face to face. When we first exhibited there, we were focused only on prospecting, but now when we go, we get to visit with clients. Many of the exhibitors at Heckerling are trust officers at some of our more than 200 bank and trust clients, and we have worked with and received referrals from many of the attorneys speaking at the sessions. The satisfaction of going to Heckerling is not just the generation of new business, though thankfully that still happens. The real fulfillment is seeing clients we have had for over a decade – peers that have been a part of our growth and have grown their business alongside ours.  

It is also interesting to see the continued expansion in the industry we helped develop and to welcome others who are also trying to help trustees maximize this often-misunderstood asset of life insurance. We are proud of our part in helping to initiate and lead this progress.  

This year, Leon Wessels, who is spearheading growth at our new trust company, and John Barkhurst, who is heading up business development on our TOLI services, will be attending. Please take the time to stop by and bring along your toughest problems about the life insurance policies you handle. You will not find two more capable people on the exhibit hall floor to solve them.

If you stop by and see them at booth #128, you can also find out how to get a free PDF copy of The TOLI Handbook, the most comprehensive guide available for TOLI trustees and take the ITM TwentyFirst TOLI Challenge for the chance to win a prize.

We hope to see you there.