In the first two entries in this series we outlined the TOLI outsourcing model and examined the many advantages of outsourcing the administration of your TOLI trusts. In this entry, we will explore the vulnerability for most TOLI trustees – policy management. While the case to outsource can be made generally on economics alone, we have seen time and time again that trustees simply do not have the requisite skills or training to truly manage a life insurance portfolio in-house. We regularly see situations where the wrong decisions involving a policy create real liability for the trustee. There are three areas where we see this most consistently.
Outsourcing is a word that has been bandied about in the business world. The term has been used interchangeably with off-shoring, the process of moving business positions and applications overseas where cheaper labor drives down costs. What I will be talking about is true outsourcing, the use of an outside US based firm to take over internal tasks. Outsourcing can lower costs, improve the customer experience, place the focus on core competencies, grow revenue, mitigate risk, and allow access to information and skillsets not held within your bank or trust company, accounting or law firm. Outsourcing the administration of your Irrevocable Life Insurance Trusts does all of this.
Last week we reported on on a $37.5 million settlement paid by Mass Mutual Life Insurance Company for a lawsuit that alleged the carrier “was obligated to pay additional dividends on its participating policies.” Recently, a similar lawsuit settled for a much higher sum. Penn Mutual Life Insurance Company settled a suit for $110 million that alleged that the carrier failed “to pay the full amount of annual policy dividends out of divisible surplus that are due.” The suit was initially filed in November of 2012 by a husband and wife who together owned 5 Penn Mutual participating whole life contracts, on behalf of them and “all persons similarly situated.” (1)
A class action lawsuit brought against Mass Mutual Life Insurance Company has resulted in preliminary approval of a $37.5 million payout. The payout benefits policyholders of Mass Mutual participating policies held between January 1st, 2001 and December 31st, 2016. A participating policy is one that receives dividends. ITM TwentyFirst has begun to receive notices of the payout that was agreed to in a document filed March 13th of this year in United States District Court District of Massachusetts. ITM TwentyFirst manages or reviews almost 1,000 policies from the carrier, the majority being whole life participating policies.
In August of 2016 we wrote about a cost of insurance (COI) increase from Lincoln National (now Lincoln Financial Group) on a block of policies originally underwritten and issued by Jefferson Pilot from 1999 to 2007. Lincoln Financial purchased Jefferson Pilot for roughly $7.5 billion in cash and stock in a transaction that closed in 2006.
Since the beginning of the year, we have written about two carriers restricting their in force ledgers. John Hancock recently noted a “temporary” situation on its Performance UL policies issued in certain states from 2003 to 2010, and alerted us that current assumption illustrations were unavailable for those policies. Current assumption illustrations are those based on the current interest being credited and the current cost of insurance (COI) being charged on a policy. In March of this year, Transamerica alerted us that they would “only run illustrations based on the guaranteed maximum charges and the guaranteed minimum interest rate” on a block of in force policies. We noted that this was the second time that Transamerica placed restrictions on a block of policies. The prior restriction was a precursor to a cost of insurance increase.
A new methodology for calculating policy reserves for life insurance policies has taken effect. The new methodology grew out of the 2009 National Association of Insurance Commissioners (NAIC) revisions to the Model Standard Valuation Law. Dubbed Principle-Based Reserving (PBR), the law was to take effect on the first day of the next calendar year if 42 states enacted the revisions by July 1st. The threshold was passed in 2016 and as of today, 46 states have adopted the revised laws.
In 2004, Prince took part in a ceremony honoring George Harrison at the Rock and Roll Hall of Fame. Sharing the stage with such rock luminaries as Steve Winwood, Tom Petty, and Jeff Lynne, Prince joined the group in a rendition of “While My Guitar Gently Weeps” by providing firepower on the song’s guitar solo, and he did not disappoint. About halfway through the six minute and fifteen second YouTube video, Dhani Harrison, George’s son, smiles at Prince, knowing what is to come. Prince then launches into a three-minute performance in which he doesn’t just play notes, but makes the guitar an extension of his body. Great guitarists make it look easy – it just flows, and that night it did for Prince. By the time the last note rang out, with Prince tossing his vintage Fender Telecaster into the audience, the members understood what a singular talent he was.
It is estimated that every year, seniors in the US surrender or lapse over $112 billion dollars in life insurance death benefits (1). Most of them probably have no idea of their options, but grow tired of the premium payments and walk away without maximizing the value of an asset they may have paid for over a lifetime. For the uninformed consumer, this could be just a lost opportunity, for the Trust Owned Life Insurance (TOLI) trustee, this can be a source of potential liability.