Restrictions were placed on in force illustrations for a handful of carriers, which limited our ability to review some policies. In a February post we noted that John Hancock cited “regulatory standards that govern illustration practices” for limiting the illustrations on some Performance UL policies issued between 2003 to 2010. The issue stemmed from the fact that “experience has differed from the current assumptions which are reflected in the illustrations.” In at least one instance in 2016, restrictions on in force illustrations were a direct precursor to a cost of insurance (COI) increase.
The cost of insurance (COI) increases of the last 18 months have wrecked estate plans and created financial hardship among policy owners. The negative effect is clear – some policy carrying costs have more than doubled (see:Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees). What is not so clear – who is to blame?
A recent US Tax Court Memo identifies the financial risk in unwittingly or intentionally mismanaging a life insurance policy. In 1987, a policy owner purchased a single premium variable life policy (since this was pre Code Section 7702A, it was not considered a modified endowment contract) with a payment of $87,500. The policy contract permitted the owner to take loans from the policy, allowing any unpaid loans and interest that accrued to be added to the “policy debt.” Once the policy debt exceeded the cash value of the policy, the carrier could terminate the policy after giving the policy owner notice and the opportunity to pay down the policy debt to avoid termination.
In the past few years, we have seen a rash of lawsuits against 401(k) plan sponsors. Most of these suits allege that plan sponsors shirked their fiduciary duties, usually for allowing excessive fees or self-dealing.
The TOLI world has been altered with the estate tax law changes of the last few years. Today’s wealthy couple can pass on more than ten million dollars in assets to their heirs before incurring any estate tax liability. In the last decade this has decreased the number of individuals subject to the estate tax by more than 80% (1). Because of this, the number of new ILIT's (and thus the number of new ILIT policies being written for ILIT's) has dropped. The resulting drop in new policy sales has led to another change, an increase in replacement policies as agents look to existing policies as a source for new business. In fact, we review far more replacement policies than new policies for our Managed Solution outsource clients.