TOLI REVIEW
Fiduciary Issues
Helping Your Client
Expanding Your Practice
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Trust Owned Life Insurance
A Fiduciary Storm is Brewing for:
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Institutional Trustees
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The “Brother-in-Law” Trustee
•
The Advisor
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Trust Owned Life Insurance
Who is the Trustee?
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80% are Non-Professional
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Family
Friends
20% are Corporate and Professional Trustee’s
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Banks
Trust Companies
Attorneys
CPA’s
Financial Advisors
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Trust Owned Life Insurance
A Big Asset to Ignore
In Young Families, life insurance
may equal 3 to 10 times net worth
In Senior Estates, life insurance
may equal 25% to 50% of net worth
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Trust Owned Life Insurance
Will the proceeds
of the trust-owned
life insurance trust
be available
when needed?
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Trust Owned Life Insurance
Quantifying the Risk
For Example, if you are Trustee for 100
policies, on average you have:
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•
•
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Total Death Benefit – $127,099,600
Premium – $1,466,800
Cash Value – $11,118,300
27 Policies will lapse worth $34,316,892
(Based on 2006 Investment Scorecard, Inc. Insurance IQ)
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Trust Owned Life Insurance
Quantifying the Risk
•
Lost Guarantee Provisions – $4,448,486
•
Death Benefits without any or full extended maturity projection
– $103,840,373
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Policies not projected to last past life expectancy – $12,328,661
•
Policies with outstanding loan balances – $8,515,673
(Potential Death Benefit Liability)
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Policies with suspended premiums– $187,750 in annual
suspended premium
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Policies rated C, D, F or U – $52,823,940
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Trust Owned Life Insurance
Is the policy still
providing the coverage
for the best value
(i.e. performance)?
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Trust Owned Life Insurance
Is Life Insurance a Lifetime Purchase?
•
Have you refinanced your house?
•
Have you replaced your old TV?
•
Have you replaced your computer?
•
Have you reviewed your life insurance?
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Trust Owned Life Insurance
Old Generation of Policies
Problems:
1.
2.
3.
4.
5.
Poorly Performing Policies
Higher cost of mortality
Policy Design was less flexible
Existing loans or low cash value
Needs have changed
Opportunity:
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Improve cost / benefit by replacing
Sell policy in secondary market
Refinance the policy
Ownership and restructure
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Trust Owned Life Insurance
Other Policy Issues
1.
2.
3.
4.
5.
6.
7.
Incorrect policy ownership
Term insurance period expiring
No conversion right on term insurance
Unknown loans against policies
Poor financial ratings of carrier
Company sold or merged
Declining interest rates
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Trust Owned Life Insurance
Who Advises the Client to Review?
CPA?
Not Likely
Trustee?
Uninformed
Agent?
40% are Orphans
Attorney?
The Trusted Advisor
Do you have a fiduciary liability?
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Trust Owned Life Insurance
ASS U ME ?
“I assumed the client spoke to the agent.”
“I assumed the premium had been paid.”
“I assumed it was regularly reviewed.”
“I assumed the insurance company notified the
client of declining performance.”
“I assumed…”
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Trust Owned Life Insurance
TOLI is a Hot Topic
Midwest Trust Company settles out of court
for $10,000,000. The policy lapsed and the
insured was insurable.
American Banker’s Association has made
TOLI a new priority.
Trusts and Estates magazine has published
articles on TOLI recently.
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Trust Owned Life Insurance
As Your Client’s Trusted Advisor…
1. What is your legal obligation?
2. What is your ethical obligation?
3. How can you improve your practice
and your income?
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Trust Owned Life Insurance
Adding Value to Client Relationship
1.
Help to identify potential problems that don’t involve document
drafting.
2.
Help to save money or create profit opportunities outside of “tax
savings”.
3.
Create good will by showing you care, that you go the extra mile.
THIS CREATES GREATER CLIENT TRUST AND REFERRALS
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Trust Owned Life Insurance
A recent study found that 75% of trust-owned life insurance
policies could support at least a 40% increase in death benefit
at no additional cost, or maintain the same death benefit at a
40% cost reduction:
A study of a large portfolio of TOLI [Trust Owned Life
Insurance] policies held by a cross-section of bank trustees
indicated a 75% chance that the death proceeds payable to a
trust, for the benefit of its beneficiaries, could be increased
by 40% or more with no increase in planned funding. Or,
alternatively, funding could be reduced 40% or more with no
decrease in death benefits payable to the trust.
American Banker - February 3, 1998; Page 17; Volume 163; Number 22
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Trust Owned Life Insurance
75% OF Your Clients Can Benefit from a TOLI Review
Free insurance
Lower premium
Profit from sale
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Trust Owned Life Insurance
Case Study
New Policy Pricing Models
Existing Policy:
Paid up – No premium
$332,000 death benefit guaranteed
Cash value $181,000.
Replacement Policy:
1035 existing cash value
No more premiums
$824,000 death benefit guaranteed
~ NO COST TO CLIENT ~
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Trust Owned Life Insurance
Case Study
Female Age 81
• Existing $15 million of coverage
• Carriers:
AA and AAA
American General
Hartford
Connecticut General
• Age of policies: 5 – 8 Years old (Purchased in her 70s)
You would assume no problem, right?
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Trust Owned Life Insurance
Case Study
Policy Review showed:
•
If premiums continued without increases, then
all policies will terminate in 3-8 years
(Age 84-91).
•
To keep existing coverage in force to age 95
required 82% premium increase, i.e. $542,000
to $897,624
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Trust Owned Life Insurance
Case Study
Real Cost
Premium
+ Gift Tax @ 50%
Current
$542,000
$271,000 vs.
$813,000
Increase
$897,624
$448,812
$1,346,436
Effective premium increase of
$533,436 annually
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Trust Owned Life Insurance
Case Study
Solution:
Save $428,000 premium annually and
guarantee coverage to age 120
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Trust Owned Life Insurance
Case Study
Company
Benefit Amount
Current
Premium *
Premium
Required **
Replacement
Premium ***
Savings
American General
$ 3,000,000
$ 112,000
$ 185,000
$
89,000
$ 96,000
American General
$ 3,000,000
$ 112,000
$ 185,000
$
89,000
$ 96,000
Connecticut General
$ 4,000,000
$ 137,000
$ 220,000
$
115,247
$ 104,753
Connecticut General
$ 2,000,000
$
$
96,624
$
57,624
$ 39,000
ITT Hartford
$ 3,000,000
$ 112,000
$ 211,000
$
118,000
$ 93,000
$ 15,000,000
$ 542,000
$ 897,624
$
468,871
$ 428,753
Total
69,000
* Coverage will cease in 3 - 8 years
** Premiums required to keep current policies in force to age 95
*** Solution: New Policy premiums to guarantee coverage to age 120
Trust Owned Life Insurance
Case Study
How is this possible?
Death Benefit
Existing Policy Cash Value
$2,000,000 Connecticut
$24,249
$4,000,000 Connecticut
$99,719
$3,000,000 Hartford
Life Settlement Market
$112,500
$3,000,000 American General
$94,183
$3,000,000 American General
$94,183
$536,844
→ → →
Increase in Cash Value of $1,963,156
$2,500,00
Trust Owned Life Insurance
Case Study
Tax Treatment of the
“Newfound” $1,963,156
No Taxes Due
In this case, total premiums exceeded the total purchase price ($2.5M),
so there was no gain. (Premiums Paid = Basis)
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Trust Owned Life Insurance
Case Study
Underwriting
Applied to 27 major companies - Only ONE gave a Standard Offer
12
Declined
7 Offered Table 4+
5 Offered Table 3
2 Offered Table 2
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Trust Owned Life Insurance
Case Study
This Works For:
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Policies held in trusts for Estate Planning
Old Split-Dollar Plans
Buy-Sell Policies
Target Market: 70+
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Trust Owned Life Insurance
Fiduciary Duty
“… it is the duty of the trustee of a trust containing as one of its assets a
life insurance policy, to examine regularly the question the Uniform Act’s
philosophy: whether that policy should be sold under a life settlement, and
the proceeds thereof invested in assets providing a more immediate
return…” - Dean Edward Miller, Banking Law Journal May ‘02
“There is clear evidence that suggests that life insurance professionals have
a duty to inform policy owners of the availability of the life settlement option
even if it is contrary to the insurer’s interest. Trustees and other fiduciaries
must closely monitor the performance of life insurance policies held in trust
to insure that they are meeting the objectives of the trust. Failure of a
member of either profession to do so may subject him to legal action for
failure to exercise the required level of due care.” - Robert P. Copeland,
J.D., M.B.A., Elder Law and Estate Planning, Attorney and Author
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Trust Owned Life Insurance
Lifetime Settlement Option
Individual, Corporate, and Trustee
policyholders can raise money
by treating their insurance
coverage as an asset.
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Trust Owned Life Insurance
Insurance Product Development
Life Insurance
Term
Whole Life
Annuity
Deferred Annuity
SPIA
(Single Premium Immediate Annuity)
•Annuity Renewable
•Universal Life (fixed)
•Fixed Return
•Single Life
•Level Term (10/15/20/30 yr) •Variable Universal Life
•Variable Return
•Joint Life
•Return of premium Term
•UL with Guaranteed No Lapse
•Short Term
•Lifetime with Life Certain
•Variable with Guarantees
•Longer term
•Fixed Return
•100% First Year Cash Value
•Flexible Withdrawal Options
•Cashectomy Policy
•Variable with “Guaranteed Flow”
•Sliding Scale Premium
•Variable with “Ratchet”
•Guarantees with Catch Up Provisions
•Annuities / Long Term Care
•Return of premium Universal Life
•Hybrids
•Variable Return
•Rated Annuities
•SPIA with Death Benefit
•SPIA with Immediate Returns
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Life Settlement
Life Settlement
What is the Value of a Life Insurance Policy?
1.
2.
3.
4.
5.
Cash value?
Surrender value?
Rev. Proc. 2005-25 value?
Settlement value?
Intepolated terminal reserve value?
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Life Settlement
History
1. Viatical Business of (early 90’s)
AIDS Cases / Terminally Ill
2. Corporate Owned Life Insurance (late 90’s)
Iacocca Example
3. Emergence of Capital Markets
Coventry
Berkshire Hathaway
European Capital
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Life Settlement
Future
$160,000,000,000 (Billion) Market
Anticipates obsolete Life Policies
Increase in Exclusions
Unaffordable Policies
Declining Cost of Replacement Insurance
Arbitrage of Selling Old / Buying New
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Life Settlement
Why Settle a Policy?
Policy No Longer Needed:
Beneficiary dies, “keyman” policy obsolete, children are grown
and independent
Policy is No Longer Efficient:
Replacement may be more cost efficient
Change in Tax Liability:
Increased exclusions, reduced estate tax, or estate tax repeal
Policy Objectives Change:
Client may be more concerned about long term care and could sell policy
and purchase LTC or annuity
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Life Settlement
Factors That Contribute to Settlement Value
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Policy Face Value
Insured’s Life Expectancy
Outstanding Loans
Policy Cash Value
Ongoing Premiums to Keep Policies In-Force
Competition Among Settlement Companies
Good Ol’ Fashioned Bargaining
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Life Settlement
How much might a policy be worth?
Below 70
-
Virtually No Market
(Unless Serious Health Issues)
Age 75
-
15% of Face Value
Age 80
-
20% of Face Value
Age 85
-
25% of Face Value
The shorter the life expectancy, the higher the price
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Life Settlement
Taxation
Sale price = $200,000 (20% of Face)
$1,000,000 – Face
$50,000 – Basis
$60,000 – Cash Value
$50,000 Basis - no tax – return of premium
$10,000 Ordinary income – cash value gain
$140,000 Long term capital – sale price in excess of cash value
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Life Settlement
Everyone over 75 should have policies
appraised, reviewed and outline options
for:
- Selling
- Refinancing
- Replacing
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Improve Your Practice
Improve Your Practice
1.
Go through your files and identify all clients 70+ with life
insurance.
2.
Send letter recommending a review of the estate plan in light of:
a) changes in exemptions.
b) need for updating facts and circumstances.
3.
When appointment is set, request that they bring their most
recent existing life insurance billing statement and annual policy
update because you want to confirm the coordination of the
policy and the estate plan.
4.
When they meet, do your normal review - Most are wanting to
update the “squander clauses” anyway.
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Improve Your Practice
5. Ask for insurance “billing” and policy report, because it is a key
element of the plan.
6. Ask:
a) “When did you last have your policy reviewed?”
b) “Do you know how this policy is performing?”
c) “Old insurance products are like old
computers – obsolete and low performance.”
d) Suggest they review the policy.
e) Ask them to sign a release of liability that you
prepared for them related to any representations
of their insurance.
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Improve Your Practice
7.
Explain that they can have an agent review it or a “policy audit”
by an outside service for $150 per policy if they don’t want to
meet with an agent.
8.
Give them a copy of:
Why You Need to Review Your Life Insurance Policy
Available at: www.outsourceins.com
9.
Ask them to send you a copy of the results of the review for your
records.
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SUMMARY
1.
Don’t assume what your clients tell you about their insurance is
factual.
2.
Eliminate potential fiduciary liability by getting a release.
3.
Help your client by recommending a “policy audit”.
4.
Integrate this into your practice.
5.
Use this to revisit your largest clients and get referrals.
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