The TOLI Handbook – Chapter 15: Understanding Life Expectancy Reports

In our last blog, we wrote about remediation and the challenges that TOLI trustees have when managing a policy.  Remediation is not just developing the best options for an under performing policy, increasingly it means maximizing the value of a policy that a grantor believes is no longer needed, or one whose expected funding has stopped. These decisions must be well-thought-out and every data point that can be gathered should be utilized in a process that prudently steers the choices made. Often the decisions made are not black and white, they are grey and while the outcome may not be controlled, the process can.

One tool that TOLI trustees need to become aware of is a life expectancy (LE) report.  It grew out of the life settlement market where investors needed to gauge the expected lifespan of an insured and the premium costs until a benefit will be paid to calculate a fair purchase price for a policy that would enable them to make a profit on the investment.

It also provides a great tool for TOLI trustees attempting to make decisions about the management of a policy. The underwriters at ITM TwentyFirst determine the life expectancy calculation based on age, gender, lifestyle, smoking status, family history and medical condition (underwriting factors) to create the LE report. The life expectancy report typically includes the life expectancy estimate and can include the probability of mortality each year based on the insured’s specific underwriting factors.  The best way to show the value of an LE report is through an example.

A trustee of a portfolio of three current assumption universal life (CAUL) policies totaling $10 million in death benefit has been informed by the grantor, a male, age 85, that no more gifting would occur to the trust. The trustee contacted the beneficiaries who informed the trustee they too were not interested in providing additional funding. The trustee was concerned about the possibility of policy lapses but wished to uphold his responsibility to maximize the benefit of the trust to the beneficiaries.

In force illustrations were obtained on all three policies assuming no further premium was going to be paid into the policies. In addition, a life expectancy report was obtained on the insured/grantor and the percentage chance the insured would be alive was plotted.  The information was summarized in the spreadsheet below.


As seen in the spreadsheet, it was projected no premium would have to be paid on any of the policies until the 8th year when Policy #2, the $2 million policy would have to be funded. All the policies would be nominally funded, allowing policy cash value to run to near zero before funding the policies with a minimal amount to keep the policies in force. The last column shows an approximation of the percentage chance the insured would still be alive. The LE report obtained showed that the insured was expected to have passed away by the end of the 9th year. While the LE report is not precise, it can provide guidance, and in this situation, it gave the trustee comfort that, at least for now, nothing should be done to any of the policies in the trust.

Using an LE report adds a data point to a prudent process. The key to mitigating liability is in the process, not the outcome.  A great example of that is shown on page 127 of the TOLI Handbook, a 155-page guide for TOLI trustees and anyone dealing with life insurance.

To download your FREE PDF copy of the TOLI Handbook, go to

John Hancock Performance UL COI Increases Have Little Clear Pattern

In May of this year, we reported that the first letters informing policyholders of the COI increase in John Hancock Performance UL products arrived.  In that post, we noted we would report back when we had reviewed in force illustrations to determine the amount or pattern of the cost increases.  Our NYC office headed up by Frank Tomasello did just that.  Frank, along with Pat Hall and Mike Irey, reviewed 140 of the policies we manage for institutional investors and found the COI increase was spread over the policy portfolios with no clear-cut pattern based on issue age or other factors, though they did note some trends.

Most of the COI increases we have seen in the last few years have no clear pattern.  Transamerica, a carrier who has announced a number of increases has seemingly had a random distribution of increase amounts – some COI increases in the single digits and some, like the policy we reported on in February of 2016, with increases of 99% which caused carrying costs to more than double.  In April of this year, we reported that the carrier was instituting increases that would compound over three years, effectively causing the COI increase to reach 168% after three years.


Of the policies we reviewed, the range of increases went from a low of 0% on one policy to a high of 90% on a policy issued in May of 2007 on a female, issue age 75. As seen in the chart to the right, about 60% of the increases in our portfolio were in the 11-50% range.

JHCOI_ByAgeWith this new John Hancock increase, there was no clear delineation of issue age affecting the percentage increase.  If you remember, we reported back in November of 2015 that AXA, when it increased the COI on its Athena II policies for all insureds with issue age 70 and above, had a two-tiered and consistent increase amount.   We found those policies issued on insureds in their 70s appeared to show an approximate 29% increase in COI rates, while policies issued to insureds in their 80s were much higher, reaching 72%.

With the new John Hancock increase, the highest percentage increases were scattered among the age groups as seen in the chart to the right.  The only general pattern that can be noticed is that the issue ages with the highest COI increases are typically followed by issue ages with the smallest increases – followed by a gradual increase upward until the increase drops off again.

When we reviewed the COI increase based on the sex of the insured, we found that for our population, the increase for females skewed higher than for males.  Approximately 64% of the policies on males fell in the 11-50% increase range, for females the approximate same percentage fell in a higher range, 31-70%.  Not surprisingly, the average increase for females was greater than that of males.  The COI increase on females averaged 47.52%, males averaged 35.75%


The John Hancock Performance UL policy had several different “series” that are noted on the bottom left of the policy contract.  In the portfolio of 140 policies we studied, we had two 01PERUL series and two 09PERUL series policies.  Those four policies were statistically insignificant, but we did review 103 of the 06PERUL series policies and 33 of the 03PERUL series policies.

The issue dates for the 03PERUL series ranged from 9/1/2004 to 12/27/2006, the 06PERUL issue dates ran from 9/7/2006 to 7/24/2009.

The clear majority, approximately 85%, of the 03PERUL policies fell in the 11-50% COI increase range, with only 3 higher than 50%.  In the 06PERUL portfolio, 76% of the policies were spread evenly across three ranges from 11-70% and 42% had COI increases of 51% or more, resulting in a higher average increase in COI rates.   The average increase in the 03 series was 29.03%, the increase in the 06 series was 44.80%.


It must be pointed out that the portfolio that ITM TwentyFirst manages – though a large portfolio for one company to be managing, is still a relatively small percentage of the policies affected.  We cannot confirm if the statistics we have found will hold true for the entire block of policies affected, we can provide guidance only on those we can analyze.

If there are any questions or comments about this study, please contact Frank Tomasello at





JH Hancock Settles Cost of Insurance Case For Over $91 Million

John Hancock, in a court filing posted last Friday in the Southern District of New York, agreed to pay just over $91 million to plaintiffs who participated in a lawsuit alleging the carrier had forced them to pay “unlawful and excessive” cost of insurance expenses in universal life policies.  This particular suit was different than others that have been filed against carriers because this suit alleged John Hancock should have lowered rates in its policies since mortality rates “declined significantly over the past several decades” and expectations of future mortality experience “likewise substantially changed in its favor.”  In the suit it was noted that John Hancock had “repeatedly stated in regulatory filings over the past 15 years that mortality experiences were substantially better than it expected.” Yet even though the mortality experience was much improved over expectations, “John Hancock has not lowered the COI rates it charges its customers,” even though the carrier “contractually promised” to review COI rates “at least once every 5 policy years.”

According to the original lawsuit there was a “mutual and reciprocal commitment” between the carrier and the members of the class action lawsuit – “policyholders agree to let John Hancock increase COI rates if expectations of future mortality experience get worse, and in return, John Hancock agrees to decrease COI rates on its customers when there is an improvement in mortality experience. John Hancock, however, has failed to live up to its end of the bargain.”

The Memorandum issued by the court pointed out the exhaustive nature of the case which started two and a half years ago.  The plaintiffs’ attorneys and staff reviewed “over 340,000 pages of documents (including over 2000 spreadsheets)” and had experts spend “23 days onsite at John Hancock’s offices in Boston, Massachusetts extracting reams of data on tens of thousands of policies.”

The settlement provides the members of the class action lawsuit with a $91.25 million cash payment, with the money “distributed directly to Class members, with no need for claims forms and no funds reverting to John Hancock.”

This case, 37 Besen Parkway LLC v. John Hancock Life Insurance Company, is separate from the case we wrote about on June 11th of this year.  In that case, John Hancock was being sued for actual cost of insurance increases on its Performance UL policies.  We will have an update shortly on an analysis of those increases.

First John Hancock Cost of Insurance (COI) Increase Letters Arrive

In February of 2017 we reported John Hancock had placed limitations on inforce ledgers for certain Performance UL policies.  A year later, in February of this year, we wrote that The Life Settlements Report, a trade publication, reported that John Hancock had voluntarily notified the state of New York that it would be raising the cost of insurance (COI) on 1,700 Performance UL policies.

Today, our New York City office received the first official COI increase announcement from the carrier.  The letter, dated May 7th, noted that the carriers’ “expectation of future experience has changed” and for that policy, the cost increase would occur on the next policy anniversary date.

The carrier provided several “options to manage the increase,” including; increasing the premium to keep the current death benefit in force, reducing the death benefit to “keep the current premiums the same,” or maintaining both “current death benefit and premium payment,” though if that option were chosen, “your policy will not remain inforce as originally projected.”

The carrier also offered the option to surrender the policy, though they “strongly encourage” policy holders “to consider the value of your policy and the goals you established when you purchased it” before taking that course.

The carrier provided an 800 number to contact “dedicated service representatives” for assistance and “personalized information and illustrations specific to your policy,” and noted they are “committed to working with” policy holders to choose an option that “best meets their needs.”

We are not sure of the size of the COI increase. According to a John Hancock representative contacted by our New York City office, the amount of the increase will vary by policy.   The representative also noted that roughly 4,000 Performance UL policies were evaluated and approximately 1,400 will be affected by the increase, though we cannot officially verify that.

It appears that inforce illustrations for the policies affected will begin to flow in the next few weeks, and as they are received and analyzed we will report back on our findings.

New Report on Interest Rates and Life Insurance Carriers Notes Concern

In the past few years, we have had no shortage of entries about the historic low-interest-rate environment and the beating that life insurance policies took because of it.  Whole life dividends have dropped, current assumption universal life performance has been driven down, and in some cases, cost of insurance (COI) increases have raised carrying costs by over 200%. All primarily because of low-interest rates.  We have even written about the effect of the low rates on long-term care insurance policies, though we do not deal with them.  At times it has been downright depressing to report on well-known industry executives decrying the low rates were “destroying the viability of insurance companies” and leaving us in an “environment…unsustainable over any reasonable period.”

In the last year or so, we have seen a rise in interest rates with the 10-year Treasury recently crossing the 3% mark. It is only natural to think of a rise in rates as good news for the insurance industry.  Carriers collect premium dollars, invest the monies in fixed instruments and then pay out the benefits in the future so rising rates would be a plus, right? Not so fast.

Two weeks ago (April 23, 2018), AM Best released a special report in which it cited continuing low rates, a flattening yield curve, regulations, potential for market corrections and the need for innovation as reasons for a “negative outlook” on the US life and annuity market (1).

One issue stood out – the potential for an abrupt increase in interest rates.  As pointed out in the report, carriers “prefer gradual increases” in interest rates that “allow them to adjust their credited rates on liabilities and their asset portfolios to optimize returns.”

The report noted current underlying factors –  increasing wage growth, the effect of the Tax Cuts and Jobs Act and tariffs on steel and aluminium – that “could cause a rapid increase in interest rates.”

Wages have grown at the fastest pace since 2009 (2).  A recent Wall Street Journal article noted that firms are competing to “hire scarcer workers.”  The same article reported inflation hit the Fed’s 2% target and that a “sustained pickup in inflation in the months ahead” driven by trade tariffs and a weak dollar could “push up prices” on imports (3).

The effect of the Tax Cuts and Jobs Act may not be the only reason the federal government debt is ballooning, but it is expanding at a fast pace and that may increase interest rates. The Treasury announced in an April 30th Press Release that during the January to March 2018 quarter, it had borrowed $488 billion, a record for that period (4).  A Bloomberg report noted that spending increased at three times the pace of revenue growth in the October-to-March period (5).

A study that measured the influence of budget deficits on interest rates showed there is a “statistically and economically significant” relationship between deficits and long-term interest rates. It projected that when the deficit to GDP ratio increases by one percentage point, long-term interest rates increase by roughly 25 basis points (6).

According to a recent Congressional Budget Office (CBO) report, federal debt held by the public is projected to rise in a relatively straight-line fashion from 78 percent of GDP at the end of 2018 to 96 percent of GDP by 2028. That percentage would be the largest since 1946 and well more than twice the average over the past five decades (7).

If the study and projection are to be believed, we can expect long-term interest rates to increase by as much as 4.5% over the next decade.  The increase may not lead to a harmful outcome for insurance carriers – if the increases are not dramatic, but slow and steady. A slow, smooth increase allows carriers to “adjust crediting rates on existing products, reshape their portfolio durations and help maintain credit quality for an optimal return that would satisfy their risk-based capital ratios and risk tolerances. (1)“

But a quick jump in rates could cause issues, as the AM Best report points out, including disintermediation with policy holders dropping life and annuity policies for higher returns elsewhere in instruments like bank CDs.  Carriers with “minimal surrender protection” would be hardest hit. Policyholders left could take advantage of low-cost policy borrowing opportunities to increase loans on policies. Both events would cause liquidity risks for carriers.  In the past when this has occurred, carriers had to liquidate investments prematurely to raise cash for surrender and loan payments.

According to the AM Best report, the search for higher yields has caused insurers to lengthen bond maturity with “portfolios at their longest durations in at least 17 years,” with those at the short end – maturing in less than five years – “at the lowest point in nearly two decades.”

The effect of interest rates on bond prices is somewhat dependent on bond duration.  AM Best data shows the current market value of life industry bonds is about 6.3% over book value. However, according to the report, a 100 basis point change in interest rates would bring the market value below book value, creating unrealized losses and the unrealized gains that accrued while rates were at historic lows could quickly start to reverse, which would negatively affect reserves.  The saving grace is the “longer-tail nature” of most insurance carrier liabilities, but again, liquidity needs would exacerbate the problem.

The life insurance market and insurance carriers, in general, have weathered an extremely fierce economic storm in the last decade. Let’s hope the next few years bring smooth sailing with gently increasing rates and a calm financial market.



  1. Best’s Special Report, Abrupt Interest Rate Hike Could Pose Challenges to Life Insurers, AM Best, April 23, 2018
  2. America Gets a Raise: Wage Growth Fastest Since 2009, CNN Money, February 2, 2018
  3. US Inflation Hit Federal Reserve’s 2% Target in March, Harriet Torry and Andrew Tangel, Wall Street Journal, April 30, 2018
  4. US Treasury Press Release,
  5. Mnuchin Sees Solid Treasuries Demand After Record U.S. Borrowing, Saleha Mohsin and Randy Woods,, April 30, 2018
  6. Budget Deficits and Interest Rates: What Is the Link?, Edward Nelson and Jason J. Buol, Federal Reserve Bank of St. Louis.
  7. Congress of the United States Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028




The Life Insurance Dividend Season (Continued)

In an earlier entry, we reported on the dividend declarations from two of the gold standard mutual insurance companies – Northwestern Mutual and Massachusetts Mutual. Both are very highly rated carriers, and have paid dividends each year for well over 100 years. However, like most insurance companies these days, both are feeling the effects of the historic low interest rate environment, and as a result, have reported lower dividend interest rates (DIR).

MassMutual’s reported DIR for 2018 is 6.40% – a drop from the 2017 rate of 6.70% (which was down from the 2016 DIR rate of 7.10%). Northwestern Mutual declared a 2018 dividend interest rate that dropped to 4.9% from the 2017 DIR rate of 5% (which was down from the 2016 DIR rate of 5.45%).

Since our last post, both New York Life and Guardian Life have reported their dividend interest rates.

New York Life reported a 2018 dividend payout of $1.78 billion, the largest in the history of the company and the 164th consecutive year of dividend payouts. The DIR rate for NY Life was 6.1% (which was down from their 2017 rate of 6.2%). In announcing the DIR drop, their first since 2012, New York Life referenced, “the continued historic low level of interest rates, which constrain our investment returns.”

Guardian Life, who has paid dividends each year since 1868, reported a $911 million dividend payout. The DIR for Guardian remained the same as it was in 2017- 5.85% (which was down from their 2016 rate of 6.05%).

So, for 2018, 3 of the 4 carriers mentioned lowered their DIR. It will take a while for portfolio returns to turn around for insurance carriers. Almost exactly 3 years ago we reported on the dividends for these same four carriers. In that entry, our visual was a battleship and the title referenced the fact that raising dividends is much like turning a battleship around. We featured a quote from the chairman of New York Life at the time, who noted, “The downward pressure on interest rates continues to be challenging for life insurers.”  In announcing the 2018 dividend, Roger Crandall, MassMutual Chairman, President and CEO, referenced the “backdrop of a prolonged low interest rate environment.” Not much has changed.

However, this week the Fed raised rates by a quarter of a percentage point to a range of 1.25 to 1.50 percent, its third rate hike this year, with its forecast of three additional rate increases in 2018 and 2019 unchanged.

Maybe by next year the battleship will really begin to turn around.

The Year in Review: Trust Owned Life Insurance (TOLI) in 2017

While 2017 was another challenging year for those of us who manage life insurance portfolios, ITM TwentyFirst started the year highlighting the efficiency of life insurance in an ILIT as a preferred method of passing wealth to the next generation. In our first post of the year we cited an example of a 65-year-old couple in good health purchasing a survivorship guaranteed universal life (GUL) policy. The policy relies on a fixed annual premium paid in full and on time each yemedium[2].jpgar for its guarantees, but for those with the cash flow to fund the asset, the return on the death benefit is very attractive.   As seen in the spreadsheet to the right, if the death benefit was paid twenty years out (age 85) the internal rate of return (IRR) on the death benefit would be 11.36%. If it was paid 30 years out (age 95) the IRR would be 5.36%. Even at age 100, the IRR would be over 3.6%. Remember, the policy death benefit is guaranteed (if the premium is paid in full and on time), which makes these returns even more attractive when compared to other “guaranteed” investments. Yes, life insurance can be a great way to leverage assets to the next generation, but managing the asset can be difficult and this was another trying year.Restrictions were placed on in force illustrations for a handful of carriers, which limited our ability to review some policies. In a February post we noted that John Hancock cited “regulatory standards that govern illustration practices” for limiting the illustrations on some Performance UL policies issued between 2003 to 2010. The issue stemmed from the fact that “experience has differed from the current assumptions which are reflected in the illustrations.”  In at least one instance in 2016, restrictions on in force illustrations were a direct precursor to a cost of insurance (COI) increase.

Some carriers did increase the cost of insurance on policies. In July, we reported on a Lincoln National increase on a block of universal life policies. The carrier cited “updated projections” of “future costs” for providing coverage, stating “future expectations” of “cost factors, including mortality, interest, expenses and the length of time policies stay in force” changed, so COI rates were adjusted to “appropriately reflect those future expectations.” Other carriers with COI increases in 2017 included Phoenix and Transamerica.

Lawsuits against carriers for COI increases that started in 2016 spilled over into 2017, with lawsuits against both Transamericaand Lincoln National moving ahead. One case against Transamerica was heard this year. In that case, an African-American church in Los Angeles that had enlisted an investment group to finance 2,400 life insurance policies providing burial funds for congregants, filed suit, along with the investor, against Transamerica for a 50% COI increase. They alleged among other things, breach of contract in violation of California law and breach of the covenant of good faith and fair dealing. In September, a jury found in their favor and awarded $5,608,495.57 in damages.

Also in Septemberthe New York State Department of Financial Services issued regulations to protect New Yorkers from “unfair and inequitable cost increases in in-force policies.” The new regulations prohibit “life insurers from changing non-guaranteed elements in a discriminatory way for members of the same class of policyholders . . . only certain enumerated factors, which do not include profit, can be considered when seeking to change non-guaranteed elements.” Carriers are required to notify the department 120 days prior to an adverse change in non-guaranteed elements. Consumers are to be notified at least 60 days prior to any changes. As far as we know, this is the only state that has developed regulations specifically around COI changes.

A new methodology for calculating policy reserves for life insurance policies took effect in 2017. Principle-Based Reserving (PBR) lessens the need for changes to regulations and laws as new products are introduced. Under the new methodology, states “establish principles upon which reserves are to be based rather than specific formulas.” According to the National Association of Insurance Commissioners (NAIC), under the current formula, the risks, liabilities and obligations are not always correctly “reflected,” and “for some products this leads to excessive conservatism in reserve calculations, for others it results in inadequate reserves.” Reserve requirements are just one part of the life insurance policy pricing formula, other factors such as mortality and overhead expenses and investment returns, also play a major role. While regulators believe the “right sizing” of reserves will benefit consumers as holding higher reserves tends to increase costs, and holding reserves that are too low puts the consumer at risk, it is not clear yet how it will affect pricing on new policies.

The overriding concern in 2017 has been the historic low interest rate environment we are still in. As we have written about in the past, the low rates create winners (borrowers) and losers (lenders), and since insurance companies get most of their investment income by lending premium dollars until benefits are paid, they are among the biggest losers. The low rates have been linked by some to the COI increases we have seen. The fixed investment environment has also put carriers in an unenviable situation. We reported on industry executives who believe the “persistent low rates” are “destroying the viability of insurance companies,” with many companies “not earning their cost of capital,” leaving the industry in an “environment” that is “unsustainable over any reasonable period of time.”

While 2017 has had its challenges, ITM TwentyFirst is growing dramaticallly. We have hired an additional New Business Development Specialist to assist with the increasing surge in demand from financial institutions to outsource their trust owned life insurance operations. Located in the northeast corridor, Walt Lotspeich is a 20-year veteran of the trust industry, and a great asset to our team. Our outsourcing service, the Managed Solution, is the fastest growing segment of our TOLI business, as trustees focus their internal efforts on more profitable business lines and allow us to take over the day-to-day back office operations of their TOLI business.

In 2018, we will continue to grow, and in the next month, we will be introducing a new affiliated company that will further cement our role as a leader in the Trust Owned Life Insurance space. For those who are interested in learning more about our view of the TOLI landscape in 2017 and beyond, we have scheduled a free webinar for December 12th at 2pm Eastern. TOLI Issues and Solutions – 2017 Year in Review will provide one hour of continuing education credit for CFP, CTFA and FIRMA members. If interested, please click here to register.