Life insurance premium financing
is a specialized strategy that has gained
favor in recent years for high net worth individuals looking to purchase large life
insurance policies without tapping their
personal or business cash flow. For these qualified wealthy individuals, the retained capital that would go to pay a premium can be better utilized for investment
opportunities they believe will outperform the cost of the third-party financing.
Prospects for these strategies include privately held business
owners, corporate executives, hedge fund managers and private equity
executives, real estate
owners, entrepreneurs, and successful physicians
– all working with specialized life insurance advisors in
conjunction with insurance carriers that have developed products
tailored to the strategy.
To date, there has not been a trust company that specialized in life insurance, including premium financed policies – but now there is. ITM TwentyFirst, the largest manager of life insurance for trustees and institutions nationwide, has created an affiliated South Dakota-based trust company that focuses exclusively on life insurance. Though the trust company does not provide any financing themselves, it does provide the premium financing market with a logical option for housing premium financed policies.
South Dakota has long been a superior trust situs – ranked as one
of the best places to house a trust in the US year after year by leading trust
and estate planning publications. South Dakota has the lowest insurance premium
tax of any state – 8 basis points. It
prides itself on client confidentiality and does not require trust documents to
be filed publicly. The legislators are
cooperative and proactive toward trusts and have levied no state income taxes
on trust assets, and state legal statutes allow for the trust creators to
direct the trust company to follow the investment decisions of an outside
advisor, making the life insurance professional part of the process.
The Life Insurance Trust Company is the perfect company to work with. Started as an affiliated company of one of the country’s most highly regarded life insurance policy managers, the firm focuses exclusively on life insurance, with no eye toward acquiring other assets. By utilizing the services of its parent company, the trust company provides expert trust administrators and life insurance specialists that work daily with tens of thousands of policies – this is not a side asset for the company – it is their daily work. And it shows in the level of services provided.
The staff at Life Insurance Trust Company knows the trust business and understands the life insurance business – many come from that industry. It is extremely advisor friendly and will work with you to ensure that your clients and their beneficiaries maximize the value of the policy in their trust.
financing is a specialized strategy. It
just makes sense that you partner with a specialized
company skilled in the management of life insurance as an asset class. For more information, contact Leon Wessels, Corporate Business Development Manager, at 605.574.1703
A little over five years ago we wrote about a
little-known problem for trust-owned life insurance (TOLI) trustees – clients
living to age 100 – the maturity age for many older life insurance policies.
The problem is that many policies in their portfolio will not pay out a full
death benefit at maturity and the chances of insureds living to maturity are
According to a Bloomberg article, “Over
the past few decades, the average person’s lifespan has risen almost everywhere
in the world,” and the wealthy “are counting on living even
longer.” (1) In a survey referenced in the article, “53 percent of wealthy
investors said they expected to live to 100.”
While that might not be the case, the wealthy – your TOLI clients – do tend to live longer. According to the National Academies of
Science, Engineering and Medicine cited in a Washington Post article, while the
average life expectancy for a 50-year-old male in the lowest economic quintile
is 76 years, it jumps to almost 89 years for those in the highest quintile. (2)
The issue around insured living to age 100 is
acknowledged by the life insurance
industry, and policy design has been altered.
Policies issued today run well past age 100, most to age 121 and some
carriers have modified their older policies to extend the maturity date past
Some older policies mature at age 100
for cash value only, creating two issues.
If the policy matures for the death benefit and the cost
basis is less than the amount received by the trust, the proceeds above cost
basis are subject to taxation, just as if the policy were surrendered for its
cash value. The amount taxed would be at ordinary income, not capital gains
The more common occurrence
is that the policy matures with minimal cash value, much less than the death benefit that the beneficiaries expect.
What can a TOLI
When a policy comes into your trust make sure
your documentation notes what happens if the insured is still alive at policy
maturity – especially if the policy is an older policy. Make sure that all
pertinent parties to the trust are made aware.
When an insured reaches age 80 and certainly
by age 85, make sure that the annual policy reviews highlight the policy maturity
Review the policy funding with the
grantor. For policies that mature for
cash value only, the only way to receive the full benefit is to fund the policy
to endow (cash value equals death benefit at maturity). While the option to fund a policy at the
endowment premium, which is typically much higher, is rarely done, showing the
grantor (and beneficiaries) the funding option should be part of your prudent
For those insureds who reach age 85 and
beyond, a life expectancy (LE) report should
be considered. These reports, which cost
less than $500, provide the TOLI trustee with another essential data point – a
systematic estimation of an insured’s remaining life, which should be made a
part of the trust file.
Managing life insurance is not an easy
task. The age 100 maturity issue is just
one of many problems you will encounter, but it is one you can easily deal with
well ahead of time.
Near the end of last year we posted a blog reporting the 2019 dividend payouts for the big four mutual companies, all whose primary product line is whole life insurance. Dividends are a return of premium when carrier results exceed a very conservative projection for investments, income, and expenses. Dividends are paid annually on participating whole life insurance and determined at the discretion of the board of directors. They are paid in addition to the guaranteed cash values in the policy, but the dividends themselves are not guaranteed and will fluctuate. Over the last twenty to thirty years dividends have trended downward causing many whole life policies to underperform relative to expectations at policy issue. The primary driver of this decline in dividends has been the drop in the dividend interest rate or DIR, the investment component of the dividend, but the dividend itself is based on the performance of three parts.
Investment Results: The interest rate portion of the
dividend, the DIR, is based on the actual rate of return generated from the
investment portfolio. The cash value of
a whole life policy is invested primarily in fixed instruments, a typical breakdown for the investments might be:
Policy Loans: 4%
Cash and Short Term: 4%
Real Estate: 1%
Other Assets: 5%
Over the last few years with low-interest
rates affecting investment decisions, carriers have become a bit more
aggressive in their investing style, but regulations limit the investment that
can be made in equities. Some carriers have
developed venture capital investments in companies that can help them compete
in the changing technology environment.
Investment returns are still driven by fixed investments that have
lagged, and it is hoped that with current higher fixed market returns, carrier
investments will trend upward.
Mortality: Carriers make
conservative assumptions about the underwriting risks in their whole life
policies. The mortality most carriers
experience is less costly – meaning there are fewer death claims than
projected. When this occurs, the
dividend is affected positively.
Operating Expenses: Operating expenses of a
carrier are reasonably easy to predict and include overhead and marketing expenses,
including commissions and underwriting costs.
But as with mortality charges, the carriers make conservative
assumptions about them, and when the operating costs are less than expected,
the savings accrue to the dividend paid to the policyholder.
Dividends paid on a particular policy will be affected by the
cash value in the policy, whether the policy has a loan and whether out of
pocket premiums are still being paid on the policy. In general, a loan-free,
premium-paying policy will have the highest dividend payments, all else equal.
The actual dividend paid will have a dramatic effect on the performance of a whole life policy and should
be tracked annually especially if dividends will be or are currently being used to pay a premium. Out of pocket premium expectations may have
to be adjusted based on the actual dividends paid.
Trustees of ILITs should monitor carrier dividends as part of
the policy management process.
The first thing you notice
after entering the Orlando World Center Marriott Resort and Convention Center is
the lineup of vendor booths set up in the hallway – the overflow from the
cavernous convention center hall. This year’s Heckerling Institute on Estate Planning appears to
have been a great success. The number of attorneys attending was up, and
those putting on the session attracted more sponsors and exhibitors than
we mentioned in one of our last posts, we have been coming to these sessions
for over a decade and this year’s meeting was not only well attended but
generated more attention than ever for ITM TwentyFirst services. Not only was the traffic up at our booth, but
so was the interest, especially from those attorneys who were finding out for
the first time that there was a trust company that specializes in life
insurance. Many attorneys writing ILITs reluctantly become the trustee of the
policy. If not, they tend to lose track of the policy (and maybe the
client). Working with our trust company (https://lifeinsurancetrustco.com/) can alleviate an attorney-trustee
of the fiduciary burden of handling the ILIT and still enable them to stay in
contact with the client by receiving comprehensive updates on the policy and
the trust that can be part of a billable year-end review. This is one
reason that the attorneys that stopped by are viewing the Life Insurance Trust
Company as a partner in their clients’ ILIT success. According to Leon
Wessels, a TOLI veteran and the head of corporate development at the new trust
company, the meeting was very gratifying. “The level of interest in the new
trust company among lawyers attending Heckerling this year was much higher than
even I expected. I was pleased that the attorneys I spoke with understood how
we could benefit their practice. The fact that they are truly beginning to see
our value was very rewarding for me.”
Barkhurst, who heads up business development for our TOLI trust services shared
Leon’s enthusiasm for this year’s reception. “What attorneys and advisors
are beginning to understand is that there is more to managing a policy than
just tracking it. Our outsourcing service is much more than just a policy
review. We have in-house life insurance experts who provide an analysis of any
policy issues free from conflicts and deliver
to the trustee what is most important – a prudent solution laid out in a concise report. And since our solutions follow prudent
practices that are documented and made part of the trust file, we can lower
trustee risk. Lawyers understand how valuable this can be should
litigation about a policy ever occur. That is one reason they are very
receptive to the comprehensive services ITM TwentyFirst provides.”
always marks the beginning of the new year for us, and we are thankful this
year the importance of our work has resonated and grown even stronger in the
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.
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
We will report back on the progress
of the bill as it moves through the
We have three office locations across the United States, and as I write this, none will see 40 degrees as their high-temperature today, so it is no wonder we are looking forward to heading south to the sunshine of Orlando, Florida, for this year’s Heckerling Institute of Estate Planning session from January 14-18. However, it is much more than that.
It has been about 15 years since we attended our first Heckerling
session. Back then, we were pioneers in the trust-owned life insurance (TOLI)
policy review space. Before we came to market, trustees had few resources,
except local life insurance agents, to help review their portfolio. Our service
solved a significant problem: for the first time, TOLI trustees could receive a
non-biased policy review (our Standard Solution). We followed that up with a
full-service outsource offering (our Managed Solution) that provided dedicated
experts in trust administration and policy management to not only track the policy
but to handle all back-office administration and equally important, to solve
policy issues. We helped mitigate liability by creating the trust file documentation
necessary to prove a prudent process occurred.
Last year, again taking a pioneering approach, we created the
first trust company focused on life insurance (Life Insurance
Trust Company) after clients approached us looking for a trustee who would
take some or all their ILITs and not compete with them on their other assets.
Over the years, ITM TwentyFirst has grown by listening to
clients. Going to Heckerling is one way we get to do that face to face. When we
first exhibited there, we were focused only on prospecting, but now when we go,
we get to visit with clients. Many of the exhibitors at Heckerling are trust
officers at some of our more than 200 bank and trust clients, and we have
worked with and received referrals from many of the attorneys speaking at the
sessions. The satisfaction of going to Heckerling is not just the generation of
new business, though thankfully that still happens. The real fulfillment is seeing clients we have had for
over a decade – peers that have been a
part of our growth and have grown their business alongside ours.
It is also interesting to see the continued expansion in the industry we helped develop and
to welcome others who are also trying to help trustees maximize this often-misunderstood
asset of life insurance. We are proud of
our part in helping to initiate and lead this progress.
This year, Leon Wessels, who is spearheading growth at our
new trust company, and John Barkhurst, who is heading up business development
on our TOLI services, will be attending.
Please take the time to stop by and bring along your toughest problems about
the life insurance policies you handle. You will not find two more capable people
on the exhibit hall floor to solve them.
If you stop by and see them
at booth #128, you can also find out how to get a free PDF copy of The TOLI Handbook, the most
comprehensive guide available for TOLI trustees and take the ITM TwentyFirst
TOLI Challenge for the chance to win a prize.
want to thank all ITM TwentyFirst clients
for another remarkable year of growth. Without the support of our partners at
banks, trust companies, family offices, and
law firms across the country, we could not sustain the growth that has made us
the largest manager of in-force life
insurance in the country. So, thank you
for our growth over the years has been the quality of our team. From the beginning, we have focused on internal
education to provide our staff with an edge in the market, and over the years
we have also trained peers and regulators through our outreach programs. In 2018, we released a free PDF entitled the
TOLI Handbook, the culmination of over a decade of real-world insight
translated into a guide for the management and administration of TOLI trusts.
The PDF is available for free at TOLIHandbook.com.
We at ITM
TwentyFirst have always listened to our clients. We started by creating a software program
that TOLI trustees could use to manage policies. When clients asked if we could
do more, we created the Managed Solution, total outsourcing of TOLI trust administration
and policy tracking and remediation. In
the last few years, we heard from clients
looking to offload a portion or all of their ILITs to a firm that would not
compete with them in other areas and in 2018 we started the Trust Owned Life
Insurance Company (https://lifeinsurancetrustco.com/) the only trust company in the US focused on
life insurance trusts. Our initial year
has been very promising, and we look forward to helping trustees deal with this
news in the TOLI industry this year? It
had to be the changes in the estate tax laws brought about by the signing of
the Tax Cuts and Jobs Act by President Trump. The law raised the federal estate
tax exemption from $5.49 million to $11.18 million and dramatically
lowered the number of estates
subject to the federal estate tax. It is estimated that with the higher
exemption amount less than one of every 1,000 estates will subject to the tax.
mean more work for a TOLI trustee who, besides managing a policy, may now have
to justify its value to a grantor. A
savvy trustee will explain to the client that the estate tax law changes made
the policy in the trust more – not less – valuable. If the grantor no longer needs the policy to
pay estate taxes, that just means that more of the benefit is going to the
beneficiaries – and wasn’t that the goal in the first place?
grantors will still want to make changes – perhaps lower the death benefit or
limit the gifting that must occur going forward. This will mean more remediation services will
be required for a TOLI portfolio and we have found this is the weakness in many
TOLI trustee service platforms. Having a
life insurance expert on staff will be a necessity going forward unless you
outsource that job. Remember that even
if the grantor no longer thinks they need as much death benefit – or any death
benefit – your job, actually your responsibility as a trustee, will still be to maximize the asset in the trust.
we have seen trustees slip is policy replacement analysis. Some agents are using the changes in the
estate tax as a marketing tool to engage grantors and recommend a change to the
policy in their trust. The sale of
permanent life insurance in the estate planning market has dropped. LIMRA, an
industry organization, reported that the
total number of policies sold market wide dropped by 3% in the 1st
quarter of 2018. The biggest drop was in
guaranteed universal life (24%), a policy often used in estate planning. Variable and index universal life policies
saw gains, but only because the industry has shifted its marketing from death
benefit sales to income retirement sales and these policies are being touted as
excellent vehicles for that use. (2)
Agents that have focused on the estate planning market are simply not
selling the volume of new policies they have in the past and have redirected
efforts to replace existing
policies. Throughout this year – in
blogs and education programs – we have pointed out “bad” replacement
efforts we have caught. For one brought
to us by a prospect for review two years after the fact, we could do nothing, and he wound up writing a high five-figure check to make the client
whole. The prospect is now a client of our Managed Solution.
sign – the clamor among the states and associations for a Best Interest
Standard. New York has led the charge with a regulation that would require
agents to provide “the product that best
reflects the customer’s interest,” not “what is most profitable to the
seller.” The Certified Financial Planner (CFP) Board already has standards in
place that all CFP designees act with
“honesty” and “integrity,” always “in the client’s best interest,” placing the
interests of the client above the interests of the CFP. (3)
One area we
have seen increased activities this year is the life settlement market. The sales of life insurance in the secondary
market has been trending up in the last few years, and though 2018 statistics
are not in the conversations we have had with those in that market lead us to
believe that sales will be up again. The
changes in the estate tax have had a positive effect on sales and a change in
the taxation of a policy for a seller has also helped. In the past,
a seller of a policy would pay taxes on the difference between the cost basis
and the sales price – but there was a twist.
Since 2009, tax laws made the seller subtract the cumulative cost of insurance charges assessed against
the policy from the cost basis creating a higher tax bill. The new tax law did away with that, reducing
the tax burden on those who sell their policy.
insurance (COI) increases continued in 2018 with well-known carriers like John Hancock and Lincoln National raising
costs on legacy policies. We reported on
several court cases filed against
carriers that had raised their costs and in each case the carrier had to “give
back” some of the extra charges, though whether it was enough to keep others
from raising costs remains to be seen.
We at ITM
TwentyFirst are grateful for a challenging, but eventful
year, one that has seen the company grow dramatically. We now have locations in four cities and
cover the country from coast to coast. Our product line is expanding, and our company has grown to over
150 team members while still keeping in place
the high service level standards we are known for.
We are grateful
for the opportunities ahead of us and again thank you for your trust and your business.