TOLI Trustee Alert: Life Settlements – How to Sell a Policy

In our last blog, we tackled the question of when to sell a life insurance policy.  With the changes in the estate tax laws and the aging of the population in the typical TOLI portfolio, life settlements will become more prominent in the coming years, and the TOLI trustee must become aware of the sales process, so we wanted to provide a short primer for trustees who need a better understanding of this valuable policy option.

A typical procedure can be broken down into six steps:

  1. Initial Inquiry: If a life settlement is contemplated, the viability of a sale is gauged by submitting limited health and policy information to a licensed life settlement broker who can pre-screen the case and alert the trustee to the feasibility of a sale, without disturbing the grantor.
  2. Formal Underwriting: If it appears that a sale is a possibility, the grantor/insured will authorize the release of health information via signature on a HIPAA (Health Insurance Portability and Accountability Act of 1996) f Information is obtained from various health practices and physicians, and detailed information about the policy being sold and its funding needs are gathered. One or two life expectancy (LE) reports are obtained to estimate the lifespan of the insured.
  3. The Pricing Process: A package is sent to life settlement providers that includes the information that has been gathered. Providers will utilize internal proprietary spreadsheets and calculators to price the policy based on the life expectancy of the insured and the cost of funding the policy.
  4. Negotiation: In a typical life settlement sale, a broker, operating on behalf of the policy owner will facilitate several rounds of negotiation, a policy auction of increasing offers until a final price is determined.
  5. Offer Acceptance and Contracting: Once a price has been agreed upon, a contracting process ends with a closing conference and the delivery of the policy to the new policy owner.
  6. Contact After the Sale: Typically, contract language will allow the policy buyer to contact the insured periodically (usually quarterly) to update information, including secondary contacts.

While the life settlement industry could once be described as the “wild west,” today it is one of the most regulated financial sectors. If you are a trustee attempting to obtain the highest value for your client’s policy, it is best to work with a reputable broker who can act on your behalf.  Insist on a bid history sheet showing the number of providers and the offers obtained, and that should become a part of your trust file.  The price obtained can be significantly affected by the number of bidders competing for the policy.

Selling a trust-owned policy takes an entirely tax-free asset and potentially makes it taxable. How much would you pay in taxes if you sold a policy in your trust?  We will cover that in our next blog entry.


Lawsuit Filed Against Security Life of Denver for COI Increase Moving Ahead

A class-action lawsuit against Security Life of Denver, initially filed in July of 2018, is moving ahead in Colorado.  The lawsuit alleges policyholders have paid “unlawful and excessive” cost of insurance charges on Strategic Accumulator Universal Life and Life Design Guarantee Universal Life policies subject to increases announced in September of 2015.

The suit contends that there is “no possible justification” for the increase since mortality in the policies “steadily improved” from the time the policies were issued and “less than six months after the 2015 increase” the carrier’s own “Chief Actuary again certified that it expected mortality rates to continue to improve.”

The suit claims “the only possible explanation for Security Life’s conduct is that it is impermissibly using COI rates to manage and increase its own profitability” and that the increase “furthered Security Life’s goal of inducing policy lapses and relieving itself of potential death claims”  Using an increase in COI rates to generate higher profits and lapse rates “violates the terms of the Subject Policies,” according to the suit.

According to the document filed on behalf of the plaintiffs, in 2015, the year of the COI increase, Security Life paid to its parent company, Voya, an “aggregate dividend of $241 million.”  The dividend “marked a 750% increase over the single $32 million dividend that Security Life paid to Voya in 2014.”  The suit alleges “the only way that such a massive dividend could have been triggered is if Security Life was using COI adjustments to increase profitability.”  Security Life, in its rebuttal, admitted to the dividend payment but denied the rest of the allegations.

The carrier also agreed that “premium amounts may impact persistency,” but denied that they used the COI increase to generate a higher than normal lapse rate, as alleged.

The Initial scheduling conference is set for October 17th.

We will be following the lawsuit and will report back with updates.

TOLI Trustee Alert: Life Settlements – When Should You Sell a TOLI Policy?

It is estimated that over 100 billion dollars in life insurance benefits are surrendered each year by older aged citizens in the US. (1)  Unfortunately, the typical senior probably does not understand the life settlement market and the opportunity to maximize the value of an asset that many let lapse valueless after a lifetime of premium payments.

Today’s TOLI trustee needs to be aware.  With the changes in the estate tax laws and the aging of the TOLI population, the opportunity to obtain maximum value for a TOLI policy may hinge on a TOLI trustee’s understanding of the life settlement market and the reasons and methods for selling a policy.

The life settlement market grew out of the viatical market of the 1980s when people living with AIDS could sell their policies tax-free to live out their shortened lives in dignity. After the advance of drugs and treatments significantly increased the lifespan of those with AIDs, the market shifted to older individuals – typically above age 65 and the terms life or senior settlements were coined.

While life settlement sales peaked in 2007-8 right before the economic crunch, the industry has bounced back and has exhibited slow but steady growth over the last few years.

Investors like to purchase life insurance policies as an alternative to a traditional investment like stocks and bonds because they are not correlated to those asset classes, providing diversification to an investment portfolio.

Policies are sold for several reasons. For some, needs change.  In the TOLI market, the changes in the estate tax laws we have seen in the last year have altered the need for a policy to pay estate taxes. Changes in family or financial circumstances may also have lowered the death benefit need. Cost of insurance increases that have occurred, especially in current assumption life policies, have made some policies cost prohibitive for some grantors.

For the TOLI trustee charged with maximizing the value of a policy, the question – if and when – to sell a policy is essential.  Here are a couple of suggestions:

  1. Before selling a policy make sure that you have completed an exhaustive review of all your other options. If you are a client of ITM TwentyFirst’s Managed Solution, this will be done for you.  You must review all funding options for the policy – starting with the beneficiaries.  A study on the life settlement market by Deloitte pointed out, “the return on the Beneficiary’s investments to preserve the life insurance contract is likely to exceed any other investment option.” If an investor is willing to buy your TOLI policy, they are betting it is a good investment – should you as trustee?
  2. If you are going to surrender a policy for its cash value or allow the policy to run until it lapses, you must explore the life settlement option – every time. Your client, the grantor/insured, may resist the idea of a life settlement – some people are simply averse to it, but if you do not provide it as an option for any policy you are surrendering or allowing to lapse, you are opening yourself up to future litigation.  It may be next year, or it may be ten years from now when the grantor/insured dies and the beneficiaries realize that nothing is coming to them.
  3. If a grantor has made you aware that no more funding will come to the policy, but it still has significant cash value you must still examine all options for the policy – including a life settlement, but also including other options such as reducing the death benefit to allow it to run until life expectancy or policy maturity. Aaron Hanson, who heads up our Remediation Department can provide guidance in that situation.

In our next blog entry, we will review the process of selling a policy.  For more information about life settlements, review chapter 14 of the TOLI Handbook, available as a free download at


  1. Life Insurance Settlement Association (LISA), February 2015 press release



Transamerica Settles Cost of Insurance Increase Litigation

In 2015 we reported on a Transamerica cost of insurance (COI) increase on a block of universal life policies and illustrated the 40% increase in COI on one policy affected raised the annual carrying costs to maturity for that policy from $36,400 to $81,595.  That cost increase led to three separate class action lawsuits that were consolidated into one claim in November of 2016.

Preliminary approval for the settlement of that consolidated case was filed in the United States District Court in California on October 4th.  Policyholders may opt out, but those who decide to participate will receive part of a $195 million fund set aside for owners of the 70,000 policies affected, including those who terminated their policies. The payout is considered a refund of past overcharges and provides cash credits to in-force policies to supplement cash values. Those with terminated policies will receive a cash payment.

The cost of insurance increase imposed by the carrier will not be reduced going forward, but Transamerica agreed it would not impose any additional increase(s) “on any Class Policy within five (5) years of the Execution Date.”

The carrier also agreed that any increase after the five year period would be “based only on the collective effect of the cost factors assumed when the Policies were originally priced and will not increase the expected future profitability of Policies within the same plan to a level higher than projected based on original policy pricing assumptions, which is intended to ensure that Transamerica does not recover past losses.”

The agreement also includes a clause assuring the carrier would not deny death benefits for policies “based on an alleged lack of insurable interest or misrepresentations made in connection with the original application process.”

Policyholders affected will receive correspondence and if they decide to participate in the settlement will be required to release all claims against the company relating to the rate increases.

The settlement covers only those policies affected by the COI increases that occurred in 2015 and 2016.  A separate case is in progress dealing with the 2017 increase we wrote about in July of that year.  We will provide updates on the additional litigation when further news is available.

Choosing the Best Permanent Life Insurance Policy

Because we have managed life insurance for over a decade our clients will sometimes inquire about the best permanent life insurance policy to buy.  Our answer – always – is there is no single best policy.  The market usually has a “latest and greatest” policy and today it is equity index universal life (EIUL) which captured 64 percent of all universal life premium in a recent report issued by LIMRA, an industry research firm focused on life insurance. (1) However, determining the best policy will depend on your client’s financial situation, cash funding position and investment risk.

While a basic understanding of life insurance is important in helping your clients determine the best policy specifically for them, you need not be a life insurance expert to provide guidance.

Specific policy characteristics determine suitability for a client and understanding your client’s situation is important when determining the best policy.  What is your client’s risk tolerance?  Do they want a policy with significant guarantees or if a cheaper alternative could be found, would they be comfortable absorbing some risk?  What is their cash flow situation?  Do they need a policy that allows for flexible premium payment, one that allows them to fund more heavily in good years, less when cash is tight, or could they fund a certain specific amount each year?  Will they have a significant cash flow drop when they retire or will the source of funding for the trust and the policy stay in place even after entering their golden years?  Is there a need for cash in the policy to fund obligations of the trust or can the policy be lean on cash value?  As seen, a discussion with your client is important before the selection process begins.  The information below, while not all-inclusive, will provide you with the guidance to allow you to participate in a thoughtful discussion with your clients about policy purchase decisions.

Premium Flexibility

As policy guarantees increase, premium payment flexibility typically decreases.  The premium for a guaranteed universal life policy must be paid in full and on time or the death benefit guarantee is compromised.  Whole life policies have required premiums that can be offset by dividends or paid by policy loans, but premiums should be thought of as required at least until the policy develops significant cash value.  Other universal life policies (current assumption, variable, and equity index) without death benefit guarantees are flexible premium policies and can accommodate the client with varying cash flow capacity.  Another factor to consider – retirement.  Some clients will have a significant income drop in their retirement years and this should be considered.  Short pay options that front-load the premium payments in the early years of the policy may be a viable option.

Investment Risk

All things equal, for a universal life chassis policy without a death benefit guarantee, the higher the rate of return that can be generated in the cash value account, the lower the premium needed to carry the policy.  Since equity investments typically provide a higher return than fixed products, a variable universal life policy (VUL) can be shown to generate a lower premium need than a current assumption universal life (CAUL) policy.  But does your client (and his trust) have the investment risk tolerance for an equity investment?  Do you as trustee wish to lower premium costs (gifting) by attempting to generate a higher return on the policy?  A guaranteed universal life policy (GUL) has no market risk but has other issues we have mentioned and will mention soon.  Is GUL a more appropriate policy?  Decisions about  investment risk are an important part of the policy selection process.


Cash Value Growth

In a trust-owned policy, cash value growth is typically not as important as the rate of return on the death benefit provided.  A low premium is typically the driver, not cash generated.  However, cash value can provide flexibility for the trust enabling the trust to pay out cash to beneficiaries prior to death and if the trust needs change, can be distributed if the policy is surrendered; or if a more efficient policy is found, used to jump start the new policy. Whole life, current assumption, variable and equity index universal life policies can all generate significant cash value, but a guaranteed universal life policy will not. In later years, the cash value of a GUL policy will often drop to zero with the policy running only on guarantees.


Death Benefit Guarantees

While a whole life policy can provide death benefit guarantees if fully funded, it is the GUL policy used most often to provide low cost guaranteed death benefit coverage in the trust owned life insurance (TOLI) world.  Over the last two decades, these policies gained favor even with premium inflexibility and low cash values.  Other universal life policies can provide very limited death benefit guarantees, or longer guarantees if a higher premium is paid.

There is a best policy for each client and situation.  Determining the policy type is a process that must be undergone before a policy is purchased.  If not, the policy will probably eventually be replaced, often at great cost.  As trustee, you should strive to avoid this by working with your clients to determine the specific policy best for them.

For more information about choosing the best policy, check out chapter 12 of The TOLI Handbook, available in a free PDF download by clicking here.


  1. Indexed Universal Life Continues Its Hot Streak, Cyril Tuohy,, March 1, 2018



Directed TOLI Trusts – the Good, the Bad and the Best Solution

Directed TOLI Trusts – the Good, the Bad and the Best Solution

After over a decade in the TOLI (trust-owned life insurance) business, we are aware of trends that come and go.  One trend we are seeing more and more lately is the use of directed TOLI trusts.

Directed trusts divide the responsibilities of the trust into two distinct tasks – administration and asset management.  Directed trusts are not new in the industry. Once, all trustees retained full authority over both the administration of the trust and the management of the trust asset, but as the trust and financial services world evolved, responsibilities blurred. Today it is not uncommon to have the trust administration performed by a trust company with the asset management overseen by an outside firm with no relationship to the trust company.

The Good and the Bad

In theory, directed trusts are the best of both worlds – each responsible party doing what they do best.  In reality, that is not always the case.  While some TOLI trustees simply do not have the requisite skills to manage the asset in the trust and outside help would be a blessing, we have found that often the person named as the manager of the policy does not either – or if they do, they are not really paying attention to the trust.  Perhaps the person named is a layperson, a relative or friend selected by the grantor, or maybe it was the agent who sold the policy who once the sale was made lost interest.

Certainly, this is not always the case and in a perfect world, with the advisor present and knowledgeable, the outcome can be enhanced. In those cases, the trustee is protected against claims resulting from carrier solvency and product performance and maintenance and the advisor remains relevant in the relationship, resulting in a better outcome for the present policy and perhaps future sales for the advisor – a win/win.

But there are real pitfalls with directed TOLI trusts. The policy owner (trustee) controls access to the carrier and policy information which can complicate the service and policy management duties of an advisor without direct access to carrier information.  Some advisors fail to realize the magnitude of their fiduciary duty, a changing world for advisors relying on sales for revenue, but one trustees are used to.  With many advisors reaching retirement age (the average age for both financial and insurance advisors is approximately 60) one growing issue is the failure of the TOLI advisor to resign and appoint a replacement when they retire or are no longer capable of serving.  Sometimes, the advisor is not named or is unresponsive, creating a burden for the trustee and leaving the investment management of the trust in limbo.  We have even run across grantors unaware their trusts were directed.

The Solution

For those grantors looking for the best of both worlds, we can offer a solution.  At the Life Insurance Trust Company, while we prefer full discretion over the trust asset management, we also work seamlessly with outside advisors. The only trust company focused solely on ILITs, we are backed by the service engine of ITM TwentyFirst, the largest manager of life insurance policies in the US, making us uniquely qualified to serve in any capacity, even as the named investment manager of directed ILITs.

If there is an outside investment advisor, we have proven we can work in partnership to ensure the trust administration and investment direction provides the beneficiaries with the maximum value of the trust asset.  Our staff and servicing team can play a supportive role, providing the advisor with an efficient process.

Where it is appropriate, the Life Insurance Trust Company can be named co-trustee with an outside advisor, providing the continuity and direction needed for TOLI trust success.

Directed trusts will play a role in trust-owned life insurance going forward. At the Life Insurance Trust Company, we have the flexibility, knowledge, and experience to produce a successful outcome for any ILIT – directed or not.

If you would like additional information on directed TOLI trusts or the Life Insurance Trust Company, please contact Leon Wessels at 605.574.1703 or

A Life Insurance Trust Company Transfer Case Study

Recently, we posted a blog that laid out the 5-step process we undertake to move a block of policies to the Life Insurance Trust Company (LITC) as successor trustee.  There are several reasons this may occur.  Some trustees simply grow tired of the risk that ILITs represent, especially if they can remove the risk while still retaining the client in other, more profitable business lines. Some trustees do not want to offload all their ILITs, just those “orphan” ILITs that represent the most risk with minimal business upside.

Today we are highlighting the procedure behind a recent transfer of ILITs from a large and well-respected Midwest trust company looking to offload their orphan policies.  As we mentioned in a blog we posted last month, LITC specializes in working with trustees who wish to relinquish only a portion of their portfolio.  Because of the affiliated relationship LITC has with ITM TwentyFirst, the largest manager of life insurance trusts in the country, life insurance trusts, even orphan trusts, can be managed efficiently and economically at LITC.

As always, the first step in the process was the implementation of a non-disclosure agreement (NDA) providing LITC with the authority to review trust materials.  The orphan trusts coming over contained 17 life insurance policies and since this trust company utilized the services of LITC’s affiliated company for policy reviews, obtaining the information needed to review the trust and the policies was simplified.

An agreement was drawn up and signed outlining the transfer and the trust documents were reviewed by Tony McKillip, Senior Trust Officer at LITC.  Each trust document took about 1 hour to review, with all documents reviewed within a week’s time.

The 17 policies were evaluated by the LITC policy review team at ITM TwentyFirst and a few were placed into remediation for follow up analysis and documentation.

LITC legal counsel filed a petition in South Dakota to alert the court of the change in trusteeship to LITC and request approval of the governing documents.  This trust company had also asked and obtained approval from the court of the accounting in their trusts.

LITC worked with the transferring trust company to develop initial notification to grantors and beneficiaries to the change about to occur.   The notification process went smoothly with no negative responses to any communication.  Incoming inquiries to LITC were limited to questions about the fee structure which was not changing.  Some conscientious clients asked whether there was anything they needed to do to help the process along.

Approval of the court for the first petition came in shortly after the initial notification of clients occurred and the second and final petition to approve the acquisition agreement and transfer trusteeship was filed. Clients then received a second correspondence including a copy of the petition and an inventory of their trust.

The second petition was quickly approved by the court and LITC became trustee.

The whole process from start (signatures on NDA) to finish (approval by courts and onboarding of policies and trusts) took 9 weeks.

While each case will have its own characteristics, LITC found the process easily managed, efficient and most important, not taxing on the trust company transferring the assets.

For a redacted copy of the second court petition or to inquire about the process, please contact Leon Wessels at 605.574.1703 or