The Life Insurance Trust Company is unlike any other trust company in the country. Focused on a single asset – life insurance – and created by the premier manager of life insurance portfolios in the country, we provide a level of service to grantors (and their advisors) that is unparalleled.
The company is an affiliated company of ITM TwentyFirst, a firm that manages thousands of policies for trustees, banks, legal and accounting firms and sophisticated institutional investors nationwide.
ITM TwentyFirst provides the back-office services for the trust company and has developed several sophisticated tools used to maximize the value of a life insurance policy for the policy owner and beneficiary – precisely what a trustee is tasked to do. Two of these tools can be combined to lower the carrying costs of a policy on an older aged, or health impaired insured.
If you are a life insurance agent, or even an attorney, CPA, or family office working with someone who has a trust owned policy, these techniques can save your clients substantial money.
In this post, we will discuss these two tools, and in our next post, we will provide a case study showing how the trust company uses the tools.
The tools are a life expectancy (LE) report and premium optimization. A short discussion on both follows:
Life Expectancy (LE) Report:
First used in the life settlement market where investors used the reports to help price life insurance policies, it provides a systematic estimation of an insured’s remaining life. It does not predict the date or even year of death, but based on underwriting factors (age, gender, lifestyle, smoking status, family history, and medical condition), it provides a “bell curve” showing how a group of identical insureds could be expected to pass away over time. A chart in the report notes the number of deaths that could be expected to occur each year in a population of like insureds. In the trust owned life insurance (TOLI) world, we can use the spreadsheet or curve to approximate the chances of death of the subject. This is not an exact science; it is just a data point that can be added to a policy analysis when decisions are made about a policy. However, the additional information can be plugged into an analysis of the policy and its costs over time. The cost of a LE is minimal – under $400.
With all flexible premium products (typically those universal life chassis policies without a death benefit guarantee) the premium only needs to be sufficient to pay the monthly charges in the policy going forward. When you ask the carrier for an in-force illustration, they will provide you with a level premium for each year until maturity (or some point in time you select.) However, this is not necessarily the premium that has to be paid. For years, investors in the life settlement market have used a process called premium optimization to lower the cumulative cost of the policy. In premium optimization, the policy is typically allowed to run down – cash value is depleted – and then going forward only enough is put into the policy to maintain the death benefit, not create any cash value. In this way, the absolute minimum amount is put into the policy to keep it in force. The strategy works well on older aged insureds or those with health issues. In other words, insureds with a shortened life expectancy.
With the aging of the population in general and TOLI portfolios in particular (the average age of a typical TOLI portfolio is 70, and over 30% percent of the policies are on insureds age 80 and up) the use of a LE report, along with policy optimization funding should be much more common. It is not. However, at the Life Insurance Trust Company, it is a tool we employ to maximize the value of a policy for the beneficiaries.
In our next post, we will show you how we do it.