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.
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.
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
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.
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
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.
Premium, Sydney Presley, LifeTrends, October 29, 2018
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 review – it 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?
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.
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
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
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
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.
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
Whether they follow the grantor’s instructions
Whether the policy performs as expected
Before we blurt out the correct answer, let’s walk through the
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
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
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.
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.”
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
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
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.”
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.”
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
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.