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

 

How About Just Doing the Right Thing?

During an ITM TwentyFirst University webinar on trustee liability, I described a replacement case that came into our remediation department. A grantor with a whole life contract in his trust had decided to stop gifting. His agent advised him to complete a 1035 exchange of the cash value from the existing policy into a new current assumption policy. The exchange, with no other premium, would carry the new policy out past life expectancy on a non-guaranteed basis but not to policy maturity. The death benefit in the trust would be lowered, but the grantor was comfortable with this, as the focus was on limiting the costs associated with the trust. Our remediation team notified the trustee that the death benefit in the existing policy could be guaranteed to maturity by requesting a reduced paid-up policy with the existing carrier, which would contractually guarantee the existing policy’s death benefit with no additional premium. The death benefit would be lowered but would still provide $900,000 more in death benefit than the new non-guaranteed policy was proposing.

I was reminded of the case while reading an article in the Wall Street Journal explaining that the Fifth Circuit Court had “struck down” the Labor Department’s fiduciary rule, stating that the department “overreached” by requiring those who handle retirement accounts to act in the “clients’ best interest” and asserting that the “rule is unreasonable” (1). I understand the industry fight against this law. They are afraid that it will mire them in lawsuits and make the sale of some products much harder in the retirement plan community. The law as it stands only affects retirement accounts, but states are pushing to have “best interests” laws apply to non-qualified annuities and even life insurance (2), which would certainly increase the number of lawsuits.

What ever happened to just doing the right thing? In the case above, had the trustee allowed the replacement, the agent would have made approximately $20 thousand, depending on his brokerage arrangement, but the grantor’s beneficiaries would have lost almost a million dollars. Believe me, many trustees without specialized skills are allowing these cases to slip through.

At ITM TwentyFirst, we service trustees bound by fiduciary duty, and our new affiliated company, Life Insurance Trust Company, is bound by that same duty to maximize the benefit in the trust for the beneficiaries, but that duty does not extend to most of those selling life insurance products. This has created a conflict in the marketplace that trust owned life insurance (TOLI) trustees must recognize. Tomorrow, Tuesday, March 20, at 2PM, we are sponsoring a free webinar providing CE for CFP and CTFA designates that addresses the prudent purchase of life insurance. Click here to register, and if you cannot attend, stop back by our website for a replay at a later date.

 

1.) Fiduciary Rule Dealt Blow by Circuit Court Ruling, Lisa Beilfus, Wall Street Journal, March 15, 2018
2.) N.Y. Urges Life Insurance Fiduciary Standard in NAIC Rule, John Hilton, insurancenewnet.com, January 25, 2018

 

 

Phoenix Announces New Cost of Insurance (COI) Increases

This week our New York City office received letters from Phoenix alerting us to cost of insurance (COI) increases on Accumulator (I, II, III, and IV) and Estate Legacy Universal Life policies.  Per the carrier, the cost increase was necessary because “certain anticipated experience factors are now less favorable than we anticipated when we established the cost of insurance rate schedule.”  According to the letters we received, there will be a flat “overall increase to cost of insurance rates, as well as progressive increases…beginning when an insured reaches age 71 through age 85.”  A Phoenix representative told us that for policies on insureds older than 85, the full increase will be implemented at once.

Policy cost increases will take place on the next anniversary date after November 2017.

Some Accumulator products will not feel the effect of the increase until after December 31, 2020.  Those policies were part of the Phoenix lawsuit that was settled in 2015. In that case, Phoenix raised the cost of insurance on Accumulator policies issued between 2004 and 2008, with face amounts of $1,000,000 or more, and issue ages equal to or above 65 or 68, depending on the policy. The plaintiffs alleged that the increase, which took place in 2010 and 2011, “did not apply uniformly to a class of insureds, discriminated unfairly between insureds of the same class, and were improperly designed to recoup past losses” (1).

While Phoenix denied the charges, they did agree to establish a settlement fund of up to $42,500,000 as compensation for the affected policyholders. In addition, the carrier agreed to “not impose any additional COI rate increases” on the affected policies, “through and including December 31, 2020” (2).

While we do not know the COI percentage increase, we have been told by carrier representatives that it will be consistent across each individual policy type.

According to the carrier, illustrations will be available 11/6/2017 reflecting the future cost increase for all policies affected, even those that were part of the settlement.  We will be reviewing that information, and will publish our findings.

  1. Frequently Asked Questions, http://phoenixcoisettlement.com/
  2. Decision and Order Approving Class Action Settlement and Approving Motion for Attorney Fees, 9/9/15, http://phoenixcoisettlement.com/

TOLI Trustees Need To Be Aware Of Life Settlements

It is estimated that every year, seniors in the US surrender or lapse over $112 billion dollars in life insurance death benefits (1). Most of them probably have no idea of their options, but grow tired of the premium payments and walk away without maximizing the value of an asset they may have paid for over a lifetime. For the uninformed consumer, this could be just a lost opportunity, for the Trust Owned Life Insurance (TOLI) trustee, this can be a source of potential liability.

An alternative to a policy lapse or surrender is a life settlement, the sale of a life insurance policy for a lump sum greater than the policy’s cash value and less than the death benefit. The purchaser of the policy will maintain the policy by paying the policy premium until the death of the insured.

The life settlement industry grew out of the “viatical” movement of the of the 1980s when AIDS victims were given the opportunity to sell their life insurance policies to a third party for a lump sum payment to be used to provide medical and other care in the final years, sometimes months, of life. Advances in the treatment of AIDS made these types of policy sales less common, but the idea of life insurance as an asset that can be sold grew into the life settlement, or secondary marketplace, we see today.

Originally the industry was lightly regulated and some who sold their policies were taken advantage of, but today’s life insurance settlement marketplace is heavily controlled. The vast majority of states (42) have strict regulations that provide a framework for the orderly transfer of policies, with required consumer disclosures that protect the policy seller. The improved regulations have dramatically decreased issues in the sales process.

For the TOLI trustee managing life insurance today, life settlements are an option that must be considered. Because of changes in the estate tax, increased policy costs, and the natural evolution of trust goals, there are more “unwanted” policies to deal with than ever. Those of you who have attended our ITM TwentyFirst University sessions in the past know that we have developed many methods for analyzing options to maximize the value of a life insurance policy. We do this because it is our clients’ (TOLI trustees) responsibility to maximize the value for their clients (life insurance trust beneficiaries), and life settlements can be a way to do that.

Typically, life settlements are available to insureds age 65 and older, though health will play an important role in whether an offer is forthcoming. Most policies sold are universal life policies – especially current assumption universal life, though other policies, even term insurance policies that can be converted to a permanent policy, can be sold. The offers depend on the death benefit of the policy, the annual premium needed to carry the policy, the life expectancy of the insured, and the rate of return that the buyer needs to make the purchase a viable investment.

The sale of a policy has potential tax implications to the seller. A life insurance policy held in trust until a death benefit is paid is received income and estate tax free, however if a policy is sold there is a possible tax liability to the trust.

While all the advantages and disadvantages of a policy sale are beyond the scope of this article, we believe that the full discussion of life settlements in the TOLI world is important enough to schedule a webinar session that will provide a TOLI trustee (and all financial professionals) with a thorough understanding of the process. Our next free webinar session, entitled Learning When Why and How to Do a Life Settlement, will be held on March 28th at 2 p.m. Eastern Time, and will provide one hour of continuing education for CFP, CTFA and FIRMA members. You can register here.

  1. LifeHealthPRO, February 25, 2015, Forfeited Life Insurance Benefits Pegged at $112 Billion

Second Amended Complaint Filed In The Brach Family Foundation Lawsuit Against AXA For Cost Of Insurance Increase

Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.

The 35-page document expands and adds to the original 18-page Class Action Complaint filed February 1 of last year, and follows on the heels of two unrelated lawsuits filed against AXA last week.

The suit, brought on behalf of the foundation and “similarly situated owners” of Athena Universal Life II policies subjected to the COI increase, alleges the increase was “unlawful and excessive” and that AXA violated “the plain terms” of the policy and “made numerous, material misrepresentations in violation of New York Insurance Law Section 4226.”

The rate hikes, which were applied in March of last year, were targeted to a group of approximately 1,700 policies issued to insureds with an issue age of 70 and up, and with a policy face amount of $1 million and up.  Since the increase was focused on this “subset”, the suit alleges that the increase was unlawful because the policies require that if a change in rates occurs it must be “on a basis that is equitable to all policyholders of a given class.”   The suit points out that there is no “actuarially sound basis” to treat policyholders differently simply because one may be 69 and one 70 at issue age, or because one may have a policy with a face amount above or below $1 million. The suit also points to actuarial studies that indicate there are actually “lower mortality rates for large face policies.”

The suit notes that there are six “reasonable assumptions” that COI changes can be based on: expenses, mortality, policy and contract claims, taxes, investment income, and lapses. AXA has stated that the COI increase was based on two of those: investment experience and mortality.

In order for the increase to be “based on reasonable assumptions” for investment income, the increase has to “correspond to the actual changes in investment income observed,” according to the lawsuit, which points out that “since 2004, there has been no discernible pattern of changes in AXA’s publicly reported investment income” that would “justify” any type of COI increase.

AXA defended its increase, in part, by stating that insureds in these policies were dying sooner than projected. However, the lawsuit claims that “mortality rates have improved steadily each year” since the policies were issued.   According to the lawsuit, the Society of Actuaries has performed surveys comparing observed mortality of large life insurance carriers to published mortality tables and has found that the “surveys have consistently showed mortality improvements over the last three decades, particularly for ages 70-90.”  The suit points out that AXA informed regulators in public filings as late as February 2015 that it “had not in fact observed any negative change in its mortality experience,” and answered no when asked if “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience.”  When questioned whether there may be “substantial probability” that the illustrations used for sales and inforce purposes could not be “supported by currently anticipated experience,” the carrier again answered no.

The suit alleges that if AXA’s “justifications” for the COI hikes are valid, “then AXA applied unreasonably extreme and aggressive haircuts to the 75-80 mortality table when setting original pricing of AUL II, and these pricing assumptions were designed to make AXA’s product look substantially cheaper than competitors’ and gain market share” and by doing so, AXA engaged in a “bait and switch” which resulted in “materially misleading illustrations, including all sales illustrations at issuance” in violation of New York Insurance Law Section 4226(a).

By focusing the increase on older aged insureds, the suit alleges AXA “unfairly targets the elderly who are out of options for replacing their insurance contracts” and forces the policyholders to either pay “exorbitant premiums that AXA knows would no longer justify the ultimate death benefits” or reduce the death benefit, lapse or surrender the policies.  According to the lawsuit, any of these actions will allow AXA to make a “huge” profit from the “extraordinary” COI increase.  According to the lawsuit, AXA originally projected that the COI increases, which ITM TwentyFirst has noted ranged from 25-72%, would increase “profits by approximately $500 million.” The lawsuit also notes that in its latest SEC filing, the carrier said that “the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings,” which the suit points out is “in addition to the profits that management had initially assumed for the COI increase.”

For a copy of the Second Amended Class Action Lawsuit in the case, contact mbrohawn@itm21st.com