Download Trust Owned Life Insurance (TOLI) A Case Study on Variable Life

TRUST OWNED LIFE INSURANCE (TOLI)
THE AUDIT PROCESS
RM Name
June 6, 2012
CRN 201403 - 158589
AGENDA
• About Lenox Advisors, Inc.
• Trustee Duties - Uniform Prudent Investor Act
• Risks and Common Problems
• Policy Audit Process
• Q&A
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LENOX ADVISORS, INC.
• We are a wholly-owned subsidiary of
National Financial Partners (NFP).
• A comprehensive, multi-faceted and integrated
financial services firm providing high net worth clients
with a variety of wealth management services.
• Offices in New York, Chicago, San Francisco,
Los Angeles and Stamford.
Fee-based financial planning services offered through Lenox Advisors, Inc. Lenox Advisors, Inc., offers access to securities and asset management services through
MML Investors Services, LLC., 530 5th Avenue, 14th Floor, New York, NY 10036, 212-536-6000, member SIPC. Investment adviser representatives of Lenox
Advisors, Inc. offering fee-based financial planning services may also be registered representatives and investment adviser representatives of MML Investors
Services, LLC. for purposes of offering securities and asset management services, as applicable. Lenox Advisors, Inc. is a wholly owned subsidiary of National
Financial Partners Corp. (NFP). Lenox Advisors, Inc. and NFP are not affiliates or subsidiaries of MML Investors Services, LLC. Services offered through Lenox
Advisors, Inc. as an Independent Registered Investment Advisor are not sponsored or offered through MML Investors Services, LLC.
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POLICES: BY THE NUMBERS
National Life & Health Underwriter Survey 300
trust owned life insurance policies:
• 17% were in imminent danger of lapsing because
of under funding
• 10% had a significant chance of lapsing before a
client reached life expectancy
Source: http://www.outsourceins.com/pdfs/ReviewingTrust-OwnedLifeInsurance.pdf, 2/22/07
300 irrevocable life insurance trusts that owned more than 525 policies.
The bank held just over $38 million in cash surrender value, but the policies they were shepherding totaled just over $425 million in death benefits.
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RISK MANAGEMENT CONSIDERATIONS
Issues you should consider:
• The average (TOLI) policy death benefit is $1,710,923.
•
The average death benefit for failing policies approximates
$3,350,000.
•
Risk to the interest of beneficiaries, the current performance and
funding with life policies is knowable and may be significant.
•
Request from TOLI trustee’s annual product suitability analysis,
and recognize the red flags warranting further scrutiny.
•
Key Bank Case –Most significant case to date as it relates to
TOLI.
Source: http://www.lifeinsurancebuyers.com/LIBI/media_files/TOLI_Risk_Management_at_Litigation_Crossroads.pdf April 12, 2007
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TRUSTS: BY THE NUMBERS
•
84% of the trusts had no written guidelines or procedures to
guide the trustee in its ownership of life insurance.
•
96% had no policy statements on how to handle
life insurance investments.
•
71% of personal trustees had not reviewed their trust’s life
insurance policies in the past 5 years.
Source: http://www.lifeinsurancebuyers.com/LIBI/media_files/TOLI_and%20Settlements.pdf 09/16/2005
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UNIFORM PRUDENT INVESTOR ACT
“A trustee who invests and manages trust assets
owes a duty to the beneficiaries of the trust to
comply with the prudent investor rule.”
“A trustee is not liable to a beneficiary to the
extent that the trustee acted in reasonable
reliance on the provisions of the trust.”
-UPIA ,Section 1, Prudent Investor Rule
This is a Uniform Act that has been adopted in 44 states. Every trust is governed
by a particular states governing law.
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UNIFORM PRUDENT INVESTOR ACT
“A trustee shall invest and manage trust assets as a prudent
investor would, by considering the purposes, terms,
distribution requirements, and other circumstances of the
trust. In satisfying this standard, the trustee shall exercise
reasonable care, skill, and caution.”
-Section 2, Standard of Care; Portfolio Strategy;
Risk and Return Objectives
“A trustee may delegate investment and management
functions… [The trustee] is not liable to the beneficiaries
or to the trust for the decisions or actions of the agent to
whom the function was delegated.”
-Section 9, Delegation of Investment and Management Functions
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TRUSTEE DUTIES - STATE ADOPTION OF UPIA
States adopting the UPIA(43)
(in whole or in majority):
Alabama, Alaska, Arizona, Arkansas,
California, Colorado, Connecticut, District
of Columbia, Hawaii, Idaho, Indiana, Iowa,
Kansas, Maine, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New
Jersey, New Mexico, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Carolina,
Tennessee, Texas, U.S. Virgin Islands, Utah,
Vermont, Virginia, Washington, West
Virginia, Wisconsin, Wyoming
Source: National Conference of Commissioners on Uniform State Laws
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FAILURES OF TOLI RISK MANAGEMENT
• No Investment Policy Statement.
• No trust provision to delegate periodic policy evaluation.
• A personal or advisor trustee who lacks extensive knowledge of life
insurance products and does not obtain credible third-party policy
evaluation.
• Not providing a periodic report to the beneficiaries confirming that the
policy is suitable for the trust purpose and that its performance achieves
benchmark expectations.
• Annual performance reports for variable universal life policies that do not
affirm the asset allocation strategy and related volatility-tested premium
adequacy evaluation.
Source: http://www.lifeinsurancebuyers.com/LIBI/media_files/TOLI_Risk_Management_at_Litigation_Crossroads.pdf April 12, 2007.
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WHAT’S THE PROBLEM
• Flexible premium policies now approximate 35% - 40% of Inforce TOLI
policies as compared to less than one percent 25 years ago. Larger death
benefit policies tend to be flexible premium non-guaranteed death benefit
policies purchased in the past 25 years.
• A significant number of Inforce TOLI policies warrant remediation due to their
under-performance of policy acceptance benchmark values. Adjust this
statistic for guaranteed policies and it is likely to be 100% of nonguaranteed policies.
• Over 90% of TOLI policies are unattached, without an assigned servicing
agent.
Source: http://www.lifeinsurancebuyers.com/LIBI/media_files/TOLI_Risk_Management_at_Litigation_Crossroads.pdf April 12, 2007.
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COMMON PROBLEMS: BENEFICIARY/GRANTOR LIFE CHANGES
Family, financial or business status may impact your clients' life
insurance coverage needs.
• Has the need for insurance
increased or decreased over
time?
• Is there an unexpected premium
increase required to fund the
policy?
• Have the financial needs and
concerns changed over time?
• Has the insured health changed
significantly?
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COMMON PROBLEMS: TRUSTEE-BASED
• Have all premiums been paid as scheduled and on time?
• Have there been any loans or withdrawals from the policy?
• Have there been statements or notices suggesting an increase
premium or of pending lapse?
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COMMON PROBLEMS: POLICY-BASED
Universal and Variable
Life Policies:
• Changes in interest rate and
expense charges
• Underperforming funds
• Appropriate premium funding
• Late premiums, lost guarantee
Whole Life Policies:
• Decreases in dividends
• Strength of Carrier
• Complex term/
supplemental riders
• Policy withdrawal or loans
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Term Policies:
• Nearing expiration of level
premium period with large
increases in premium
anticipated
• Newer term products may be
more cost effective
• Conversion features near
expiration
• Appropriate premium funding
COMMON PROBLEMS: CARRIER-BASED
• The strength and stability of the insurance company is
reflected in the financial ratings of the major rating agencies
• Carriers own investment experience
• Stock versus Mutual Companies - What's the difference?
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THIRD PARTY TOLI AUDIT
Key Bank Lessons
• The main takeaway from Key Bank was that a third-party audit
was preformed, which released the trustee from liability.
Delegation Permitted
• Trustees are typically permitted under applicable state law
(and/or by the terms of the trust) to delegate duties (e.g., insurance
reviews) to third parties. See, e.g., Section 9 of the UPIA.
Delegation Possibly Required
• A trustee might be required to delegate certain trust duties (e.g.,
insurance reviews) where the trustee does not have the required
expertise.
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TOLI AUDIT: THE LENOX PROCESS
• Fact Find
• Illustration Request
Letter
• In force Policy Pages
• Policy Management
Statement
• Policy Audit Report
• Comparison
Coverage: At the
request of the trustee
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FACT FIND
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CLIENT AUTHORIZATION LETTER
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INFORCE ILLUSTRATION FROM CARRIER
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POLICY MANAGEMENT STATEMENT
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POLICY AUDIT
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POLICY AUDIT
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POLICY AUDIT RATINGS
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COMDEX OVERVIEW
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LIFE INSURANCE RATE CLASSES
Ultra Preferred
Non-Tobacco
Select Preferred
Non-Tobacco
Non-Tobacco
Plus
Select Preferred
Tobacco
Non-Tobacco
Tobacco
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LIFE INSURANCE RATINGS
The following is a summary of the typical rating classifications utilized:
Category
Mortality Charges as %
of “Standard”
Preferred Plus
-25%
Preferred
-20%
Standard
0%
Substandard Table 2
+50%
Substandard Table 4
+100%
Substandard Table 6
+150%
Substandard Table 8
+200%
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MARKET ANALYSIS
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SOLUTION
• Discuss process with your partners on how to handle the issue.
• Identify trusts in which the firm is trustee on.
• Hire consultant to audit those policies.
• Don’t stop there, ask every client when the last time they
audited their policies.
• In fact, ask all clients if they are trustees on ILIT’s for
any of their family or friends.
• Market that you provide this value added service.
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