What A TOLI Trustee Can Learn from Existing Court Cases – Part 1*

The majority of trust owned life insurance (TOLI) settlements do not come after a court case, they are paid out behind closed doors to avoid publicity.  But the cases that wind their way to court guide the TOLI trustee hoping to avoid liability.  In this two-part series we will review several cases and outline the key takeaways for a TOLI trustee. Stuart Cochran Irrevocable Trust v. KeyBank, NA  The KeyBank case, was decided in March of 2009 and centered on a life insurance policy replacement. KeyBank, the successor trustee to an ILIT exchanged the policies in the trust for two variable life policies tied to the equity market, totaling $8 million in death benefit, in the first quarter of 1999, shortly after taking over the ILIT. After 9/11, the equity market dropped and in both 2001 and 2002 the policies lost money.   Around this time the grantor, age 52, had a financial setback and announced he would no longer fund the trust.  KeyBank paid for an outside review firm who found that with no additional premium the policies could not be expected to run past age 70 of the insured. The agent for the grantor suggested the purchase of a [...]

The Top Five Mistakes Trust Owned Life Insurance (TOLI) Trustees Make

Just over a decade ago, we began managing life insurance policies for TOLI trustees.  In that time, we have grown from a handful of dedicated team members to the largest life insurance policy management firm in the country with 175 employees and hundreds of clients.  It is no wonder the growth has occurred.  Life insurance is a confusing asset, and the tax and estate planning requirements around trust administration are cumbersome. Having an expert handle this asset makes sense.  Over the years, trustees and advisors have asked us for a list of the most common mistakes we have seen made by TOLI trustees.  We have whittled the list down to the five mistakes we see most often. Failing to Price Services Correctly: Trustees often price insurance trusts as an accommodation. In an ITM TwentyFirst survey, we found one third of trustees charged under $750 per trust and 15% charged only $250-$500. To properly manage life insurance, you need an expert administrative staff, competent legal counsel and life insurance specialists who understand a complex asset. Can you provide that with a pricing model this low?  Most trustees charge $1,000-$1,500, which is more in line with costs and should be the starting [...]

Finally, a Place for Orphan ILITs!

The last few years have been a tumultuous time in the life insurance trust business.  The prospect base is shrinking after the Tax Cuts and Jobs Act raised the federal estate tax exemption from $5.49M to $11.18M per person.  Today only 1 in 1,000 estates affected by the estate tax (1).  The asset class has become even more cumbersome to manage, as policy performance has suffered and sophisticated policies with more moving parts leave trustees with a greater chance for something to go wrong, just when the society around us seems to have become more litigious – especially in the life insurance space. Many trust-owned life insurance (TOLI) trustees are questioning the viability of their TOLI business model - and perhaps some should.  Especially those whose portfolio includes many orphan accounts – those grantors whose only business with the bank or trust company rests in a trust that generates minimal revenue, but a considerable liability. The answer?  It’s a three-step process: Review all the ILITs in your portfolio and determine which represent significant other revenue for your firm. ILITs without additional revenue represent little more than a liability to most banks and trust companies. For those orphan ILITs with clients [...]

Lawsuit Filed Against Voya Cost of Insurance (COI) Increase

In May of 2016 we reported that the cost of insurance was being raised on a specific block of approximately 18 universal life products originally issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company.) Lincoln Financial Group was the administrative agent and reinsurer on the policies.   We were unsure of the total number of policies affected. Last week (August 15th) a Motion for Certification was filed in the United States District Court – Southern District of New York  questioning whether Voya “breached the standardized, form insurance policies owned by all members of the proposed Class by raising cost of insurance (“COI”) rates, and whether Aetna’s reinsurer, Lincoln, was unjustly enriched as a result.” The heavily redacted document points out that any change in COI on the policies in question were to be based on “estimates for future cost factors,” and be applied across an entire class on a “uniform or nondiscriminatory” basis. The Complainant stated that they will present evidence “Aetna breached these contractual provisions, and that Lincoln was unjustly enriched.” According to the court document,  the New York Department of Financial “agreed that the rate hike was illegal” and the carriers “abandoned the [...]

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 [...]

The TOLI Handbook – Chapter 16: Remediation, the Weak Link for Trustees

A TOLI trustee we work with received a request from a grantor tired of gifting to pay premium on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage.  The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured. While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit). Trustee choices in this case: Guaranteed $3.9 million of coverage with increasing cash value. Non-guaranteed $3 million of coverage with decreasing cash value. [...]

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This Is A Custom Widget

This Sliding Bar can be switched on or off in theme options, and can take any widget you throw at it or even fill it with your custom HTML Code. Its perfect for grabbing the attention of your viewers. Choose between 1, 2, 3 or 4 columns, set the background color, widget divider color, activate transparency, a top border or fully disable it on desktop and mobile.