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,, January 25, 2018



Mass Mutual Class Action Settlement Means Small Payout for Participating Policyholders

A class action lawsuit brought against Mass Mutual Life Insurance Company has resulted in preliminary approval of a $37.5 million payout. The payout benefits policyholders of Mass Mutual participating policies held between January 1st, 2001 and December 31st, 2016. A participating policy is one that receives dividends. ITM TwentyFirst has begun to receive notices of the payout that was agreed to in a document filed March 13th of this year in United States District Court District of Massachusetts.  ITM TwentyFirst manages or reviews almost 1,000 policies from the carrier, the majority being whole life participating policies.

The settlement grew out of a case filed in 2012 against the carrier that, according to information provided by the court (1), alleges the carrier “withheld more surplus than allowed by Section 141 of Chapter 175 of the General Laws of Massachusetts.”  The suit, which was brought by a Massachusetts resident on behalf of herself and others with a similar claim, maintained that “MassMutual therefore was obligated to pay additional dividends on its participating policies in years during the Settlement Class Period.”

Mass Mutual, as its name implies, is structured as a mutual insurance company, owned by its policyholders, not outside investors.  The carrier denied any wrongdoing in this case, saying they settled the case to avoid additional expenses, disruption, and risk.

The amount of the payout “is based on annual dividends paid on each participating policy…as a pro rata share of the total amount of annual dividends MassMutual paid on all participating policies issued during the Settlement Class Period.” Therefore, the larger the dividends received by a policyholder during this time, the higher the benefit.

If you presently own a policy that is part of this settlement your benefit will be received as a paid-up addition to your policy. If your policy for some reason cannot receive paid-up additions, or if you previously owned a policy that is part of the settlement but no longer do, you will receive a check for your pro rata share.

You do have options as a policyholder.  You can exclude yourself and retain rights to pursue further claims against the carrier by notifying the court by July 3rd of this year, you can object to the settlement in writing by the July 3rd date, or you can attend a hearing scheduled for July 27th in Boston to speak out on the case. If you do nothing, the settlement amount will be paid out to you as noted above.

Attorney fees will be paid out of the settlement, but will be limited to no more than 25% of the settlement amount.

This is a preliminary settlement and if and when the court approves a final settlement, “a final order and judgement dismissing the case will be entered in the Action.”

While the $37.5 million settlement number may seem large, Mass Mutual will pay out an estimated $1.6 billion in dividends this year (2). The settlement amount will average approximately $22 per policyholder, a fraction of the dividends paid yearly on a typical well-seasoned Mass Mutual whole life policy.

For additional information, a website has been set up at  For a copy of the Agreement and the Class Notice, email

  1. Class Notice, United States District Court for the District of Massachusetts, Karen L. Bacchi v. Massachusetts Mutual Life Insurance Company
  2. Mass Mutual Press Release dated November 7, 2016

Dividends at The BIG 4 Carriers Mostly Down, But Are Interest Rates Finally Going Up?

A couple of weeks ago, we reported that Northwestern Mutual had declared its 2017 dividend and had not only lowered it but also increased some costs (see: Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise). Northwestern Mutual was the first of the so-called “Big 4” mutual carriers to report. These A++ (AM Best)–rated companies are considered to be the gold standard among life insurance carriers. The others in the group (New York Life, Massachusetts Mutual, and Guardian Life) have now all reported in, and all but New York Life experienced a drop in their dividend interest rate (DIR).

These Big 4 mutual carriers are among the most solid, stable businesses in the country. Unlike the vast majority of carriers, which sell their products through a brokerage system, the Big 4 sell their products directly to the public through an agency system of career agents tied to the companies. The career model tends to increase persistency and repeat business among clients and loyalty among agents. However, even these firms have felt the sting of low interest rates and are struggling with their investment returns. As we noted in our prior post, Northwestern Mutual’s chief investment officer told the Milwaukee Business Journal that the low interest rate environment resulted in the company’s generating $6 billion less in income than it would have in a normal interest rate environment.

The DIRs below-right represent the investment components of the dividends paid. Other factors besides the investment portion include 1-divactual expenses and mortality experiences. If mortality and expenses are more favorable than expected, it positively affects the dividend paid.

While the DIR may have dropped at most of the carriers, the actual total dollar amount paid out to policyholders actually increased at two of the carriers. Policyholders own mutual carries like the Big 4 carriers, and the divide1-payoutnds received represent a portion of the divisible surplus left after all expenses and claims have been paid. As can be seen in the chart to the right,  New York Life and Guardian Life will pay out more to policyholders in 2017 than in 2016.

Since the presidential election, we have seen a bit of an upturn in interest rates, and many prognosticators are anticipating a trend to higher rates in the Trump administration. An article in the Wall Street Journal last week cited the head of U.S. short-rates strategy at a major US bank, who believes that “government bond yields are likely to rise further.” That same article pointed out that “Investors have been scrambling for the past two weeks to position themselves for a Trump presidency that they believe will mean higher growth, higher inflation and a Federal Reserve that will be under pressure to raise interest rates in a way that hasn’t been seen for more than a decade.” (1.) While higher rates are not a simple fix, as they will affect many parts of the economy negatively, for many carriers that rely on fixed vehicles as their primary investment, higher rates, on balance, would be welcome.

  1. Traders Convinced Higher Rates Are Near, Wall Street Journal, by Min Zeng, November 23, 2016

Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise

Over the last two years, we have written extensively about the impact of the low interest rate environment on life insurance policy performance, primarily Current Assumption Universal Life policies. Many carriers have pointed to low interest rates as a primary cause for their cost of insurance (COI) increases in these policies. Anyone who has attended one of our webinars on life insurance policy subjects (see: knows that we describe Universal Life as a living Excel sheet—you can see each expense and credit in the policy if you know where to look.

Whole Life insurance is a bit harder to decipher. It is the proverbial “black box” of life insurance and the moving parts that drive performance are much less transparent. A Whole Life policy has a guaranteed cash value shown in the “as sold” illustration provided at policy issue and a projected total cash value driven by dividends paid on the policy. The dividend is determined by the actual experience of the company. There are three areas that affect the dividend paid by the carrier.

  1. Investment Earnings: If the earnings of the insurance carrier are more or less than assumed, the dividends will be affected positively or negatively.
  2. Mortality: If the actual carrier mortality experiences are more favorable (fewer deaths occur than expected), the effect on the dividend will be positive.
  3. Expenses: If the carrier’s actual expenses are worse than assumed, then the costs allocated to each policy increase. Accordingly, dividends may be negatively impacted.

Last week, Northwestern Mutual released its 2017 dividend scale and according to information received by ITM TwentyFirst we expect a decrease in their dividend scale on Whole Life policies, driven by lower earnings as well as an increase in some policy expenses.

According to that information, the investment earnings portion will experience a drop in the dividend scale interest rate for 2017 to 5% from the 2016 rate of 5.45%. The mortality component will experience no changes from 2016, but the carrier has stated that expense charges in the policies will see an increase. Overall, dividends paid on Whole Life policies will “generally be lower” in 2017.

For Northwestern Mutual ’s Universal Life policies, which are not participating (i.e., they do not receive dividends), the company announced a crediting rate drop “consistent with the 0.45% decrease to the dividend interest scale rate.” Additionally, the company announced that its Universal Life policies, both fixed and variable, will see expense charge increases similar to those found in Whole Life policies.

This announcement is another acknowledgement of the challenging times that carriers face in this low interest rate environment. Northwestern Mutual is considered by many to be one of the gold standard carriers in the industry. Their AM Best A++ rating, reaffirmed in May 2016, is the highest that can be obtained and reflects the company’s “favorable level of risk-adjusted capitalization” and “earnings diversification…along with a relatively stable investment yield when benchmarked against other ordinary life companies.” A.M. Best also noted the company’s “inherent pricing flexibility to adjust dividend scales prospectively to recognize current investment experience” as a reason for its excellent rating. (1.)

With this notice, it appears that Northwestern Mutual is simply adapting to the current world we live in. According to Northwestern Mutual‘s chief investment officer, the low interest rate environment resulted in the company generating $6 billion less in income than it would have in a normal interest rate environment. Total dividends paid on all products will actually drop to $5.2 billion in 2017, from the $5.6 billion paid in 2016. In response, the company has embarked on cost cutting measures that would pare 100 jobs by the end of 2016, with hundreds more to come in 2017. (2.)

In the notice about the changes on their inforce policies, the carrier suggested that all illustrations showing the current (lower) dividend scale/crediting rate should also be accompanied by a second illustration showing the outcome assuming an “alternate rate of at least 100 basis points below the current rate.” This is the sign of a company that is proactively providing information to help its agents and policy owners monitor policies. Let’s hope it is not a sign of further rate decreases and/or expense increases to come.

At ITM TwentyFirst, we manage close to 2,000 Northwestern Mutual policies and will be monitoring the effect of these changes for policy owners.


  1. AM Best Affirms Northwestern Mutual ‘s A++ Rating; Highlights Solid Performance, PRNewswire, May 11, 2016
  2. Northwestern Mutual to pay $5.2B in dividends in 2017, Milwaukee Business Journal, October 26, 2016


Recent Court Case Identifies An Obvious Tax Liability: One TOLI Trustees Sometimes Miss

A recent US Tax Court Memo identifies the financial risk in unwittingly or intentionally mismanaging a life insurance policy. In 1987, a policy owner purchased a single premium variable life policy (since this was pre Code Section 7702A, it was not considered a modified endowment contract) with a payment of $87,500. The policy contract permitted the owner to take loans from the policy, allowing any unpaid loans and interest that accrued to be added to the “policy debt.” Once the policy debt exceeded the cash value of the policy, the carrier could terminate the policy after giving the policy owner notice and the opportunity to pay down the policy debt to avoid termination.

For 10 years the policy owner took loans totaling $133,800 and allowed the debt to grow over the ensuing years, even after receiving updates on policy values spelling out the growing interest and policy debt. In October of 2011, the carrier notified the policy owner by letter that he would have to make a minimum payment of $26,061 to avoid termination, which would cause a taxable gain. The owner did not make the payment, and the carrier terminated the policy and issued a 1009-R to the policy owner.

The policy owner did not report the income on his joint tax return, though he and his wife did consult with tax advisors, including one that told them they were “going to owe a bunch of money.” Instead, they affixed a handwritten note to their return that explained that they did not know how to compute the tax and that the “IRS could not help when called.” They asked for a “corrected 1040 explanation + how much is owed.”

As you can imagine, this did not end well for them. According to the Tax Memo, the loans taken “resulted in a policy debt of $237,897.25,” “the termination of the policy in 2011 resulted in the extinguishment of” that debt, and “$150,397.25 (the amount by which the constructive distribution exceeded his investment in the life insurance contract) was includable in their gross income.”

This particular case seems straightforward enough. “Phantom income” will be always be attributed to a taxpayer who allows a life insurance policy to lapse when the debt on the policy exceeds the cost basis, yet, at ITM TwentyFirst, we have seen situations in which trustees have allowed this to occur. After bringing in a portfolio of policies, I once asked a trust advisor about one particular whole life policy with a very large loan and was told not to worry because “that policy has lapsed.” Luckily, with a minimal payment, it was reinstated. If not, it would have resulted in a taxable event of almost $200,000 for a trust that had no cash assets.

In another case, the liability was less transparent and off in the future.  A grantor with a portfolio of whole life policies had not been paying anything into the policies for years, allowing loans to pay the premiums. When we took over, we reached out to the agent who said he “had a plan,” essentially allowing the interest and loans to accrue on the policy. When we reviewed the policies, we realized that shortly the portfolio would be in jeopardy, and in short order, cash contributions would have to be made, or taxable lapses would occur. Even with the cash contributions, each year as the loans grew, the net death benefit on the policies would drop. This was not a good situation, and one that could have been avoided with a little educated foresight.

These two cases highlight two types of liabilities for trustees. The first is easy to see (but sometimes is missed); the second can only be seen with a thorough analysis (which is often not done). On Tuesday, September 27, ITM TwentyFirst University will be hosting a free webinar entitled, How Trustees Can Avoid Getting Sued. The session will include the thorough analysis we provided on the second case above as one of the “real life” case studies. The session will provide one hour of continuing education for both CFP and CTFA designations. To sign up, simply click this link:


Why Brexit Is Bad For Your Life Insurance Policy

The historic vote this week on a non-binding referendum to determine whether the United Kingdom should leave or remain in the European Union has made headlines. The 52–48% vote, with a participation rate of almost 72% of the electorate, was in favor of exit by a 4% margin.

The fallout from this decision has been felt around the world, but how will it affect life insurance carriers and your life insurance policies? Unfortunately, the effect will probably be negative. The consensus is that the UK exit from the EU will harm the economy worldwide. The International Monetary Fund (IMF) recently estimated that Brexit could knock up to half a percentage point off the combined output of the world’s advanced economies by 2019. (1.)

The real issue for life insurance carriers is low interest rates, and this additional stress on the world economy means that we will probably not see rates rising any time soon. In fact, this week Fortune magazine reported that with the Brexit result, the chance of the Fed’s raising interest rates in the US “has collapsed to 0%.” Wall Street traders are “assigning a 10% probability to the Fed cutting interest rates at its July meeting and a more than 20% chance of a rate cut at subsequent meetings later this year and in early 2017.” (2.) This is not good news for life insurance carriers already struggling under the weight of historically low interest rates.

In the last year, we have reported often on the effects of low interest rates on policy performance. A quick review of past blogs will also provide a wealth of information on the Cost of Insurance (COI) increases we have weathered, which many believe was a direct result of depressed rates. Life insurance carriers invest the bulk of their Whole Life and Current Assumption Universal Life premiums in fixed investments. Even Equity Index Universal Life policies, the industry’s new darling, are invested in fixed investments. The credited returns to those policies are driven by options on an index purchased from the proceeds of that fixed investment. As long as interest rates remain at historic lows, there will be a drag on policy performance and financial pressures on the carriers.

McKinsey and Company published a report in November of 2013 detailing the effects of low interest rates on the economy from 2007 to 2012. They found that the biggest winners were governments and non-financial corporations. The biggest losers? Pension and other qualified plans and guaranteed and variable rate life insurance policies. In fact, the report noted, “Life-insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates, so much so that if this environment were to continue many of these insurers would find their survival threatened.” (3.)

That report was published almost three years ago, and things have not gotten better; they have gotten worse. Without positive changes in the current environment, I wonder what a report three years from now will find.

(1.) International Monetary Fund, IMF Country Report No. 16/169, June 2016
(2.) Fortune, The Fed is Now More Likely to Cut Interest Rates Than Raise Them, June 26, 2016
(3.) McKinsey Global Institute, QE and Ultra-Low Interest Rates: Distributional Effects and Risks, November 2013

A Decade of TOLI: The Changes and Challenges

In our last Blog post, we recapped the year in Trust Owned Life Insurance (TOLI) for 2015 (see: The Year in TOLI – 2015 Edition). As one of the pioneers of life insurance policy management in the United States, ITM TwentyFirst has the unique ability to participate in and track trends in the TOLI industry. Almost a decade ago, we surveyed our TOLI portfolio. In 2015, we updated that survey and the results clearly reveal changes – many of which will lead to additional challenges for those of us whMike_Blog_charts-1o manage life insurance policies.

The population in our TOLI portfolio is aging. As you can see in the chart to the right, a decade ago the greatest number of insureds were in the 40-to-59 age group, which has experienced the biggest drop in the last decade. As that group’s members age, younger people are not replacing them. This is probably because the changes in estate tax laws have made it less compelling for younger individuals to place life insurance in a trust. Many of the policies in force a decade ago were placed by grantors when the federal estate tax kicked in for individuals at $1M or less. Today, estate taxes begin at $5.45M, and the need for life insurance to pay estate taxes has decreased.

Though those in the accumulation phase may not be using Irrevocable Life Insurance Trusts (ILITs) as often as their elders, this does not mean that those in the preservation phase are clamoring to drop their life insurance. The greatest jump in age groups in the last decade was the 80 – 90 and 90-plus groups. The combination of these groups makes up almost 25% of our portfolio. Like society in general, our TOLI population is aging, and this causes certain issues. Life insurance costs generally increase with age, and this increase often creates tough decisions when dealing with policies, especially those that might be underfunded. Health deterioration combined with policy failure makes policy management choices harder. Using a Life Expectancy (LE) Report as another data point when making these policy decisions will become a vital management tool as we move forward. Obtaining an LE Report may prove you took the steps to make a prudent decision even when the decision turns out to be “wrong” (see: How Using a Life Expectancy Report to Manage a Life Insurance Policy Helped Save Our Trustee.)

While life insurance policy types have not changed much over the last decade, the specific types that life insurance advisors favor have changed. Mike_Blog_charts-2When we conducted the initial ITM TwentyFirst survey almost a decade ago, the predominant policy type held in trust was Whole Life. The combination of base and blended Whole Life made up just over 40% of our portfolio. Today, that combination has dropped to just over 30%. Whole Life typically has significant cash value build-up, but some advisors think it is too expensive. After all, unless necessary for specific trust goals, the cash value in the policy is an unneeded (and perhaps costly) asset of the trust. The key to maximizing the beneficiary benefit is creating the highest internal rate-of-return on the death benefit paid on the policy, which comes from minimizing premium payments.

Term policy usage has dropped slightly, from just under 17% to just under 13% today. Most Term policies held in trusts are used for short-term needs and are either converted to permanent polices or dropped after the short-term need for the coverage is gone.

Universal Life (UL) has surged almost 50% from just under 30% of the portfolio to almost 44% today. Guaranteed death benefit UL products now make up a higher percentage of the portfolio than they did a decade ago. These come with required premiums that must be paid in full and on time which creates a tracking and administration challenge for trustees – one that comes with liability. Equity-indexed products, some with unreasonable investment expectations (see: Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies), have increased in popularity. Variable Life has seen a slight decrease in usage. Variable Life is the only policy type that requires the policy owner to make the cash value investment selection and happens to be the only policy type that can experience a cash value investment loss. The volatility in the equity markets we are experiencing lately accentuates the special care required, care some trustees cannot provide. Today we are seeing Current Assumption Universal Life (CAUL) policies, which have been the backbone of the industry, subject to cost-of-insurance increases that threaten policy health. These cost increases, unheard of only a few years ago, have increased the premium needs on some policies by 200% or more (see: Transamerica Cost Increase Causes Premium to Maturity to Jump Over 200%: A Case Study for TOLI Trustees). Challenges abound from all of these various UL products.

Those CAUL cost increases are in part due to the historically low interest rates being paid on fixed investments, which have put pressure on life insurance carriers. A CAUL policy has a current rate being credited, a minimum rate that is guaranteed, and a projected rate at issue. It is no surprise that these rates have droppeMike_Blog_charts-3d over the last decade.

As can be seen in the chart to the right, ten years ago the average interest rate credited at policy issue was 6.19%. Today it is less than 5%. The average rate being credited currently has dropped also, by almost a full percentage point. The average guaranteed rate has dropped about .5%, and many policies currently marketed today have guaranteed rates of only 2%. Times have changed – and for those insurance products relying on fixed investments – not for the better.

As life insurance trusts age, the issues around them tend to increase. As we mentioned, over the last decade dividends and crediting rates have dropped, and the older policies tend to be more negatively affected. In addition, as trust goals change over time, policies may need to be adjusted. In short, as your portfolio ages, your risks and work will tend to increase. In the current survey, 30% of the policies were over 20 years old, and 10% were over 30 years old. Ten years ago, the number of policies with a duration above 20 years was significantly less – trustee risk has increased.

One bit of good news that we found in the newest survey was the increase in highly rated policies. ITM TwentyFirst uses a proprietary Mike_Blog_charts-4rating system that measures risk to the trustee. The current 55% of “A” rated policies represents low-risk policies expected to run to contractual maturity and pay full death benefits. This percentage has grown by almost 30% over the last ten years and represents the hard work of our clients in managing their policies. “D-“ and “F” rated policies, representing the greatest risk to the trustee because they are projected to lapse prior to maturity or life expectancy, dropped dramatically and represents less than 20% of the portfolio. While these policies represent risk to the trustee, that risk can be mitigated through remediation and documentation efforts of the trustee. For our Managed Solution clients, remediation and documentation services are included as part of the offering. A “U” designation represents unrated policies, typically group policies with limited information or policies we are in the process of rating.

Challenges for TOLI Trustees have changed over the last decade as insureds aged, products changed and interest rates have fallen. However, insurance remains a critical component of many estate plans and we’ve seen the value insurance plays in the life of beneficiaries. So the key is for TOLI trustees to make sure they are prudently managing the policies for the beneficiaries. Although life insurance is a peculiar financial instrument and the decisions that must be made around policy management are rarely black or white, having the appropriate processes, procedures, policy information, policy reviews and remediation expertise can really help trustees mitigate liability and deliver results for the client.