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.

The Life Insurance Trust Company Solves Major Problems for Veteran Life Insurance Agents and Advisors

Four years ago, it was reported that the average age of a financial advisor in America was 51, with 43% over the age of 55 and many heading towards retirement (1). One year later, an industry publication noted that the average age of a US life insurance agent was even higher — 59 (2).

Many veteran life insurance agents have worked for years building a book of business by focusing on entrepreneurs, business owners, and professionals — in other words, the high-net-worth market. It has served them well and now, as they begin to look back on their careers, they are also looking forward to their options.

One option is to sell their book of business to a younger associate. To be successful, this process should be carried out over a number of years with the junior agent developing relationships with the clients. Most veteran agents became successful because their practice was relationship based, not transaction based; handing off the business to another is hard unless there is a relationship.

Another option is to simply slow down — to throttle back the practice and take more time to enjoy life. This can mean shorter days and longer vacations, still with one foot in the office door to keep the relationships strong and develop additional business — although not at previous levels. For many life insurance producers, that option is appealing.

Both options present challenges, but one challenge can be resolved rather easily. Unlike the financial services market in general, life insurance has not kept up with the technological advances in investment management. Software and online services make investment portfolio selection, as well as asset tracking and reporting, easier than ever, thereby cutting office costs. The same cannot be said of life insurance, where policy tracking and management is still a cumbersome and expensive back-office process.

Clients of most veteran life insurance producers utilize a trust company to house their policies for estate planning and distribution reasons. A new trust company — the Life Insurance Trust Company — is providing services that will make clients happy and agents’ lives much easier by affording them an opportunity to lower costs and increase services.

The Life Insurance Trust Company utilizes one of the most sophisticated policy management systems available today. Developed internally over 15 years, it provides an annual review that not only tracks policy performance but also alerts all to policy triggers, such as conversion options.

The Life Insurance Trust Company utilizes the back-office services of their affiliated company, ITM TwentyFirst, the nation’s largest manager of TOLI trusts, so the agent can be assured that premiums are paid on time. With specialized insurance professionals on hand, the Life Insurance Trust Company can alert the grantor and agent to any issues that arise and contact the carrier to obtain the information necessary to make prudent decisions about the policy.

Although the trustee owes a fiduciary duty solely to the beneficiary, they understand the life insurance business and its products and will work together with the advisor to maximize the asset in the TOLI trust.

Because they do all the heavy lifting by gathering information from the carrier, the agent is relieved of the past back-office expense, which lowers their overall office expenses while maintaining or even increasing their client service levels.

For more information about the Life Insurance Trust Company, visit https://www.lifeinsurancetrustco.com/, or contact Leon Wessels at 605.574.1703 or lwessels@lifeinsurancetrustcompany.com.

 

  1. Melanie Waddel, “43% of Advisors Older Than 55: Cerulli,” ThinkAdvisor.com, January 21, 2014.
  2. Andrea Wells, “Young Agents Survey: The Next Generation Steps Up,” InsuranceJournal.com, April 20, 2015.

 

TOLI Trustees Can Gain Guidance From 401(k) Lawsuits (and the TOLI Handbook)

In the past, we have written about 401(k) lawsuits flourishing and what trust owned life insurance (TOLI) trustees can learn from them. This week, a research paper concerning 401(k) lawsuits landed on our desks that can provide guidance to trustees handling life insurance. The report published by the Center for Retirement Research at Boston College notes that “over 100 new 401(k) complaints were filed in 2016–2017 — the highest two-year total since 2008–2009” (1).

The number of TOLI lawsuits has not increased like the number of 401(k) lawsuits has … yet. Regulations around 401(k) plans have been in place much longer than those concerning TOLI trusts. The Employee Retirement Income Security Act of 1974, which governs 401(k) plans, is almost 45 years old, but lawsuits have only proliferated over the last ten years. In the TOLI world, the Uniform Prudent Investor Act and the Office of the Comptroller of the Currency’s Unique and Hard-to-Value Assets handbook are much more recent guides.

The guides mentioned above share one common characteristic that was pointed out in the research paper — they do not “spell out” specific directions for managing an asset. They all provide general guidance, but it is up to the trustee to take that guidance and develop a process to prudently manage the assets. ITM TwentyFirst has just published a free handbook that provides more specific direction.

The authors of the research paper cite three main areas of contention in the 401(k) world that can be applied to the TOLI world.

  1. Inappropriate Investment Choices: In the 401(k) world, this relates to options in the retirement plan. In the TOLI world, this could relate to the separate account investments in a variable policy or even a broader application — the choice of the policy type. Variable life investment options are chosen by the trustee, not the carrier, which layers in another trustee responsibility. (See Chapter 9 in the TOLI Handbook for guidance.) Moreover, the asset in a TOLI trust must match the trust’s temperament and goals as well as the grantor’s financial situation. (See Chapter 12 in the TOLI Handbook for guidance.)
  2. Excessive Fees: 401(k) investment fees are easy to see, but in the TOLI world, the costs within a policy can be much more opaque. We have witnessed situations in which trustees were ready to accept replacement policies that had internal costs that were 3–4 times more than the existing policy. Why? Because they had no process in place with which to review the new policy and instead relied on the word of the salesperson. Without a process in place, a trustee could easily be held liable. (See Case Study #5 starting on page 128 of the TOLI Handbook for guidance.)
  3. Self-Dealing: According to the Boston College research paper, self-dealing occurs when a fiduciary acts in “its own best interest rather than serving” its clients. In the TOLI world, we have had our own lawsuits in this area — one in which a major bank that had received a large commission on a policy in its trust fought back against a lawsuit by beneficiaries who charged that the trustee had “violated the prudent-investor rule” (see page 14 in the TOLI Handbook for more information on how), and another in which trustees were held liable for over one million dollars when the beneficiary charged that they had breached their fiduciary duties. (See page 17 in the TOLI Handbook for further explanation.)

Many pundits believe that the trustees of trust-owned life insurance policies will encounter increasing liability in the coming years. The well-informed trustee will be less likely to be among those facing litigation. The TOLI Handbook – available here – can help inform.

 

  1. George S. Mellman and Geoffrey T. Sanzenbacher, “401(k) Lawsuits: What Are the Causes and Consequences?” Center for Retirement Research at Boston College, May 2018.

 

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

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

 

 

TOLI Trustees Can Learn From 401(k) Lawsuits

Those of us in the fiduciary world are aware of the rash of lawsuits targeting 401(k) plans. Fidelity, the largest retirement plan provider in the US, settled lawsuits filed by its own employees alleging that its plan choices were too costly (1). Vanguard, a firm known for its low costs, was referenced in a suit alleging that by selecting classes of mutual funds with higher costs when lower-cost funds were available, plan fiduciaries breached their duties under the Employee Retirement Income Security Act of 1974 (2).

While the virtues of each case can be debated and the final verdicts are eventually handed down by the courts, the cases themselves provide those in the trust owned life insurance (TOLI) community with guidance and insight. A few observations follow:

Times are changing. While discussing the Vanguard case, an attorney noted that a fiduciary must not “take anything for granted.” Instead, he/she must “view things new and fresh with respect to evolving fiduciary standards, and have an open mind (2).” We could not agree more. Do you think that the executives at Boeing, when they set up their 401(k) plan to benefit employees, ever thought that they would settle a multi-million-dollar case in which they admitted to violating Employee Retirement Income Security Act (ERISA) provisions (3)? Or that well-respected companies would have ever thought they would be sued for selecting their own funds in their company-sponsored plans? I doubt it. ERISA, the guidebook for 401(k) fiduciaries, is 44 years old, but it took 30 years for the first 401(k) lawsuits to trickle in. Now, it is a tidal wave. The Uniform Prudent Investor Act (UPIA), the TOLI trustee guide, is 26 years old. Will the evolution of fiduciary standards that is battering the 401(k) world hit the TOLI market? Perhaps. Will TOLI trustees be ready if it does?

The UPIA “regulates the investment responsibilities of trustees,” including TOLI trustees. It directs trustees to “invest and manage the trust assets solely in the interest of the beneficiaries,” yet too often, decisions are flavored by the whims of the grantors, to the possible detriment of the beneficiaries. The document points out the responsibility of the trustee to “monitor” and “investigate” the trust asset, yet some TOLI trustees simply do not have in-house experts who are capable of carrying out this task with life insurance. And the result could be catastrophic. In an ITM TwentyFirst University webinar just passed, we pointed out a replacement case in which a trustee was advised to replace a policy with one that had costs that were 400% higher. Clearly, that transaction, if completed, would have violated Section 7 of the UPIA that directs trustees to “only incur costs that are appropriate and reasonable in relation to the asset,” leaving the trustee open to litigation. Luckily, it was caught by our remediation team, but how many “bad transactions” are out there?

While the fiduciary climate may be evolving, some truths remain, and a recent article on designing 401(k) plans to avoid lawsuits pointed out two of them (4).

First, when there is an issue, the trustee will lose in court “when it can be shown [that] the fiduciary was unaware of the issue or otherwise didn’t look at it or understand it.” The Latin term is ignorantia juris non excusat (ignorance is no excuse). In the replacement example above, the trustee could have been held liable for the improper transaction because he/she did not know how to analyze the policies involved. The OCC Handbook on Unique and Hard-to-Value Assets points out that a “fiduciary must understand each life insurance policy that the trust accepts or purchases, or…employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company to prudently manage these assets.”

Second, the article points out issues, such as higher costs are not always necessarily bad, if they can be justified. With life insurance, for example, death benefit guarantees may make a policy costlier, but the higher costs may be justified based on trust investment goals and risk tolerance. But higher fees become “legally problematic” if the fiduciary “isn’t able to demonstrate it engaged in a prudent decision-making process” to show why the higher costs were justified. As emphasized in the article, “prudence — and the documentation of it — is the key ingredient” for trustees and fiduciaries who must demonstrate that they have made a proper decision about an asset.

To successfully manage life insurance in a TOLI setting, you must understand the asset, and then develop and document a prudent process for the decisions that are made regarding the policy. If not, you will open yourself up to liability.

 

  1. Fidelity Settles Lawsuits Over Its Own 401(k) Plan, Melanie Hicken, CNN Money, August 18, 2014
  2. New 401k Suit Targets Vanguard Fund Fees, Greg Iacurci, investmentnews.com, January 5, 2018
  3. Boeing Settles “Spano” Fee Case, John Manganaro, planadvisor.com, August 27, 2015
  4. How to Design a 401(k) That’s Lawsuit-Proof, Greg Iacurci, investmentnews.com, March 19, 2018