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

Earlier this year we started the TOLI Challenge with the question: What is most important when determining the liability of a trustee’s actions? Click here for that answer.  Today, we have a follow up true or false question.

Only permanent life insurance policies can be sold in the life settlement market, True or False?

It may surprise you that the answer is false – some term policies actually can be sold.  Term policies, without cash value, are most often surrendered back to the carriers for no value when, under the right circumstances, they can be sold into the secondary market, providing the trust with additional cash that can be passed down to the beneficiaries or used to fund other policies.

The key is whether the policy is still convertible.  As you may know, term policies can have a feature that allows the policies to be converted to a permanent policy with the same carrier at the same underwriting class but at the new age of the insured.  So, a term policy taken out on a 45-year-old insured ten years ago and initially underwritten as a preferred risk can be converted to a permanent policy at preferred rates for a 55-year-old – without the insured going through the underwriting process.

Most conversion options are for a limited period, or to a certain age, so you must check to see if the term policy conversion option is still available.  If it is, the policy may be marketable.

To see if it is, you will have to ask the carrier to provide you with a conversion illustration showing the premium requirements for the new permanent policy.  Once obtained, you can contact a life settlement broker who will review the policy costs and the health records of the insured to determine whether the policy is saleable and at what price.

Not only are convertible term policies often sold into the secondary market, they rank just behind current assumption universal life policies, as the most popular life settlement policies.  However, most TOLI trustees are unaware of this opportunity.  The fiduciary duty of a TOLI trustee includes maximizing the value of the asset in their trust – even a term policy that appears to have no value.

New Legislation Introduced in Congress Would Help Seniors and the Life Settlement Industry

A bill introduced in Congress could help spur sales of life insurance in the secondary market by allowing policyholders to use the proceeds from the sale of a life insurance policy to fund an account to be used for paying long-term care expenses on a tax-favored basis. 

HR Bill 7203, introduced by U.S. Rep. Kenny Marchant of Texas, a Republican, and U.S. Rep. Brian Higgins of New York, a Democrat, has been referred to the House Ways and Means Committee. The bill would allow policyholders to reduce “the amount of gain from the sale or assignment of a life insurance contract … by the amount of contributions to a long-term care account” as long as the contribution was made “during the 30-day period beginning on the date of such sale or assignment.”

Currently, in a life insurance policy sale, the policy owner is taxed on the amount above the cost basis – typically the premium paid. This new law would allow a policy sale to occur tax-free, and then allow the policyholder to place the proceeds into a newly created long-term care account that would be “exempt from taxation” as long as the account was used for paying for long-term care.

Tax-free distributions could be made from the accounts to pay for “qualified long-term care services” as well as “premiums for a qualified long-term care insurance contract,” for both the beneficiary and the beneficiary’s spouse, and after the death of the account beneficiary, the account would revert to the spouse.   

The accounts created would be held in trust by a bank, an insurance company, or “another person who demonstrates to the satisfaction of the secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.”

Any amount distributed from the account that was not used exclusively for long-term care would be includable in the gross income of the beneficiary and subject to a 20% surcharge, except in cases where the beneficiary dies or becomes terminally or chronically ill under current law. 

The proposed law greatly expands the tax advantages of selling an unneeded life insurance policy in the secondary market, and if passed, would provide the policyholder with another reason to explore the life settlement market.

We will report back on the progress of the bill as it moves through the legislative process.

TRUSTEE ALERT- Why We Started An Affiliated Trust Owned Life Insurance (TOLI) Trust Company

On November 21, 2017, ITM TwentyFirst received a South Dakota charter for an affiliated trust company, the Life Insurance Trust Company, the first trust company focused solely on life insurance trusts.  On December 22, 2017 President Trump signed into law The Tax Cuts and Jobs Act with sweeping tax changes that included a doubling of the federal estate tax exemption amount to just over $11 million, lowering the number of estates affected annually by the federal estate tax from 5,000 to 1,700, less than 0.1 percent of all deaths (1).  Yet, we are extremely bullish about the prospects for our affiliated company.

The federal estate tax is fluid. It has been repealed four times only to reappear again.  If less than 100,000 voters had changed their votes in the last presidential election we could be looking at a $3.5 million exemption and a top estate tax rate of 65% (2).  News reports focused on the $1.7 trillion the tax bill will add to the federal deficit (3), but this is on top of the current $20 trillion dollars in debt ($170,000 per taxpayer) (4), and the additional $10 trillion that was already projected to be added to the debt over the next 10 years (5).

That much debt should raise interest costs. Interestingly, since 2008, while $8.4 trillion was added to the federal government debt, federal net interest costs incurred were near the lowest levels in 50 years (6).  That is going to change as the historically low interest rates rise.  It is projected that net interest costs will more than double in real terms and as a share of the economy over the next decade (7).  More government revenue will be needed, and if the political climate changes, the estate tax will be a target.  “We think there will be times when Congress is looking for new revenue sources, and this is a fairly easy one,” said one executive with a group that is a proponent of the estate tax (8).

But even if the political climate and federal estate tax situation does not deviate from the current, post Tax Cuts and Jobs Act climate, our affiliated trust company is still primed for success.

Life insurance, is at best, a cumbersome asset.  And ramping up internal resources – human and capital – to successfully manage an asset fraught with liability is a tougher business decision for financial institutions to make these days.  Some are looking for an opportunity to offload their life insurance trusts to a firm that will be a partner, not a competitor, and that is the business model that has been created at the Life Insurance Trust Company.  Managing life insurance trusts well without interest in the other assets a client may have, creates the perfect win/win scenario.  In some situations, a firm may wish to offload only those trusts with grantors that have no other relationship with the institution, so called orphan or stand-alone accounts.  The new company stands ready to accept only those trusts, leaving a more profitable ILIT business line.  For each situation, a tailored approach can be created.

Compliance managers at accounting and law firms whose members and partners have accepted the TOLI trustee role for clients are beginning to understand that the unchecked liability this creates is simply unacceptable with an asset such as life insurance.  A specialized trust company with robust individual and portfolio reporting provides a built-in tracking mechanism found nowhere else.

Financial and life insurance advisors looking for a home for life insurance trusts created over the years will find the advantages of this new trust company hard to pass up.  The life insurance experts servicing the Life Insurance Trust Company are advisor-friendly, and though the trust company bears a fiduciary duty solely to the beneficiary, its professionals understand that the success of the policy comes partly from working with the advisors in the field.  Another plus – advisors are provided with one of the most complete annual policy reviews available anywhere, alleviating them of this back-office expense, a welcome benefit for those advisors looking to downsize or reduce office expenses.

Life insurance trusts have many benefits besides tax advantages, including protection from creditors and the ability to control the passing of wealth to beneficiaries, important in those situations where spendthrift, mental illness or addiction issues may play a role.  But in the last few years, we have seen that the management of this asset may best be handled by an organization with specialized resources and talents.

For those who would like to learn more about the Life Insurance Trust Company, a special one hour webinar is planned for Tuesday, January 30th, 2018 at 2PM eastern.  To register, click here.

For more information about this new trust company, contact Leon Wessels, Director of Business Development, at 605.574.1703, or lwessels@lifeinsurancetrustco.com

 

 

  1. Howard Glickman, Tax Policy Center, December 6, 2017, http://www.taxpolicycenter.org/taxvox/only-1700-estates-would-owe-estate-tax-2018-under-tcja
  2. While President Trump won 290 electoral college votes, 70 electoral college votes were won by less than 1.5% of the vote, including; Wisconsin (10), Pennsylvania (2), Florida (29) and Minnesota (10). Michigan (16) and Vermont (3) were won by less than .4% of the vote.  Clinton proposed a $3.5 million estate tax exemption and a top tax rate of 65%, Hillary Clinton Proposes 65% Top Rate for Estate Tax, Wall Street Journal, Richard Rubin, September 22, 2016
  3. Congressional Budget Office, Estimated Deficits and Debt Under the Chairman’s Amendment in the Nature of a substitute to H.R. 1, the Tax Cuts and Jobs Act, https://www.cbo.gov/publication/53297
  4. org, amount as of 1/24/2018
  5. CBO’s January 2017 Budget and Economic Outlook, Committee for a Responsible Federal Budget, January 24, 2017
  6. Policy Basics: Deficits, Debt, and Interest, Center on Budget and Policy Priorities, August 29, 2017, https://www.cbpp.org/research/federal-budget/policy-basics-deficits-debt-and-interest
  7. Congressional Budget Office, The 2016 Long-Term Budget Outlook, July 12, 2016
  8. Death Tax Repeal In 2017?, Ashley Ebeling, Forbes, June 6, 2013.