TOLI Trustees Need To Be Aware Of Life Settlements

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.

An alternative to a policy lapse or surrender is a life settlement, the sale of a life insurance policy for a lump sum greater than the policy’s cash value and less than the death benefit. The purchaser of the policy will maintain the policy by paying the policy premium until the death of the insured.

The life settlement industry grew out of the “viatical” movement of the of the 1980s when AIDS victims were given the opportunity to sell their life insurance policies to a third party for a lump sum payment to be used to provide medical and other care in the final years, sometimes months, of life. Advances in the treatment of AIDS made these types of policy sales less common, but the idea of life insurance as an asset that can be sold grew into the life settlement, or secondary marketplace, we see today.

Originally the industry was lightly regulated and some who sold their policies were taken advantage of, but today’s life insurance settlement marketplace is heavily controlled. The vast majority of states (42) have strict regulations that provide a framework for the orderly transfer of policies, with required consumer disclosures that protect the policy seller. The improved regulations have dramatically decreased issues in the sales process.

For the TOLI trustee managing life insurance today, life settlements are an option that must be considered. Because of changes in the estate tax, increased policy costs, and the natural evolution of trust goals, there are more “unwanted” policies to deal with than ever. Those of you who have attended our ITM TwentyFirst University sessions in the past know that we have developed many methods for analyzing options to maximize the value of a life insurance policy. We do this because it is our clients’ (TOLI trustees) responsibility to maximize the value for their clients (life insurance trust beneficiaries), and life settlements can be a way to do that.

Typically, life settlements are available to insureds age 65 and older, though health will play an important role in whether an offer is forthcoming. Most policies sold are universal life policies – especially current assumption universal life, though other policies, even term insurance policies that can be converted to a permanent policy, can be sold. The offers depend on the death benefit of the policy, the annual premium needed to carry the policy, the life expectancy of the insured, and the rate of return that the buyer needs to make the purchase a viable investment.

The sale of a policy has potential tax implications to the seller. A life insurance policy held in trust until a death benefit is paid is received income and estate tax free, however if a policy is sold there is a possible tax liability to the trust.

While all the advantages and disadvantages of a policy sale are beyond the scope of this article, we believe that the full discussion of life settlements in the TOLI world is important enough to schedule a webinar session that will provide a TOLI trustee (and all financial professionals) with a thorough understanding of the process. Our next free webinar session, entitled Learning When Why and How to Do a Life Settlement, will be held on March 28th at 2 p.m. Eastern Time, and will provide one hour of continuing education for CFP, CTFA and FIRMA members. You can register here.

  1. LifeHealthPRO, February 25, 2015, Forfeited Life Insurance Benefits Pegged at $112 Billion

ITM TwentyFirst Hires New Business Development Specialist for the Northeast to Meet Growing Demand for Life Insurance Trust Outsourcing Solutions

February 14, 2017 – Minneapolis, MN – ITM TwentyFirst – www.itm21st.com 
ITM TwentyFirst, a leading provider of life insurance trust services to financial institutions, today announced the hiring of Walt Lotspeich, a 20-year trust industry veteran based in the Philadelphia area. Walt will be responsible for new business development and sales focusing on the Northeast corridor.
 
Over the last few years, there has been a surge in demand from financial institutions to outsource their trust owned life insurance operations. Increasing regulatory pressures and a shift in focus to more profitable lines of trust business have contributed to the demand. Kurt Gearhart, CEO of ITM TwentyFirst, noted that “For years, Walt has been helping financial institutions implement solutions for different aspects of their trust operations. We are excited to have Walt join ITM TwentyFirst and work with our clients and financial institutions seeking help with their life insurance trusts.”
 
Prior to joining ITM TwentyFirst, Walt spent over a decade as a business development professional offering investment and outsource servicing solutions to banks and trust companies.
 
Earlier in his career, Walt started as an intern at a private trust company and ultimately ended up managing the Trust Operations unit.
 
Walt is originally from Parksley, VA, and is a proud alumnus of Elon University in North Carolina.  He and his wife, Natalie, live in Drexel Hill, PA with their two basset hound dogs. Walt’s interests include sailing, golf and listening to live music.
 
About ITM TwentyFirst:

ITM TwentyFirst helps banks, trust companies, advisors and investors manage in-force life insurance policies and life insurance trusts. The more than 150 team members at ITM TwentyFirst administer over 25,000 policies for more than 200 institutional clients.

 
 
walt
Walt Lotspeich
New Business Development Manager
P: 319-553-6269

Nationwide Cost Of Insurance Lawsuit May Leave You Scratching Your Head

Last July, a lawsuit was filed against Nationwide Life Insurance Company of America alleging the carrier “made false representations and omissions of material facts regarding the cost of insurance charges and cost of insurance rates” for two variable life policies. The plaintiffs in the case included the grantor of a life insurance trust, who was also the insured, his daughter, Laura, who was the trustee as well as the agent of record on the policies.

A life insurance trust created in 1994 purchased one $500,000 policy that year, and another in 1996. According to court documents, two decades later, in 2014, the plaintiffs determined that there might be a problem with the policies, when a review of the policies’ quarterly statements disclosed that “policy charges were eroding the policies’ account values.” Although the original suit mentions that a variable policy allows the owner to allocate the cash value among an array of “separate accounts,” it does not mention the rates of return obtained in the policies, or if they suffered any market losses.

According to the complaint, after attempting to gather information from the carrier as to how the cost of insurance was calculated, Laura was told by the carrier’s Office of Compliance that she would be “unable to get that question answered.”

In April of 2015, the plaintiffs sent a letter to the carrier concerning their issues around the cost of insurance and the carrier’s “false representations and omissions.” Although the letter specifically said that the claims outlined in the letter were not claims against Laura, Nationwide filed a Uniform Termination Notice against her, stating that a written complaint was filed for “misrepresentation in the purchase of a variable life insurance policy.” The plaintiffs believed this was “an egregious and abusive act of retaliation” against Laura.

The plaintiffs claimed breach of contract and fraud among other charges. The policies provide that “current cost of insurance rates” are determined “based on . . . expectations as to future mortality costs and expenses.” However, according to the suit, the carrier, “repeatedly has increased the amount of the cost of insurance charges deducted . . . for reasons wholly unrelated to changes in future expectations.”

The lawsuit pointed out the policies had “exorbitant” COI increases with “the monthly cost of insurance charges deducted by Nationwide from the policies” increasing “substantially each year (except for one year)” in both policies. The total COI percentage increases from initial policy issue until 2016 were 430% in the 1994 policy and 398% in the 1996 policy. According to the suit, the increased costs “wholly unrelated to changes in future expectations” caused the policies cash values to be “drastically eroded” leaving the policies “in imminent danger of lapsing.”

The suit asked for “compensatory damages in the form of two paid up life insurance policies … (with no future premiums required), each with a death benefit of $500,000 plus the cash value of the policy.” Note: Both variable policies were issued as Option B, which pays the stated death benefit, plus the cash value in the policy at death.

While it is clear that the cost of insurance went up almost every year since policy issue, it is not clear that the actual “cost per thousand” charges were higher than shown in the original policy “as sold” illustrations, as with other COI increase cases like Transamerica and AXA. We, at ITM TwentyFirst, have been unable to determine any COI increases in the Nationwide variable life policies that we manage, except for the year to year increases that are seen in every universal life chassis product that reflect the increasing age of the insured.

In Nationwide’s Motion to Dismiss filed August 31, 2016, the carrier characterized the case as “buyer’s remorse,” with plaintiffs creating a “reason to walk away . . . free of charge” after obtaining 20 years of “valuable life insurance coverage,” and taking the position that Nationwide was “required to charge the same amount for . . . coverage every year,” which is “contradicted by the plain terms of the policies.” Nationwide pointed out that the trustee was “a sophisticated consumer,” a life insurance agent who purchased the policies “in her capacity as Trustee.”

Nationwide included over 140 pages in their motion exhibit that included both policy contracts and copies of statements received by the plaintiffs over the years, illustrating policy performance and the increasing cost of insurance. The motion also included contract language that specified “cost of insurance rates are based on the Insured’s Attained Age, Sex, Premium Class and Duration,” language that was not included in the original plaintiff’s complaint, a “major omission,” according to Nationwide.

On January 9th of this year, Warren Eginton, Senior United State District Judge, US District Court for the district of Connecticut, denied Nationwide’s motion. On February 1st of this year, the same judge issued a Stipulated Order that FINRA would “expunge the U5 Amendment” against Laura and the agent/trustee would drop any complaints against FINRA, with each party bearing their own legal costs.

Unlike many COI increase lawsuits we have written about in the past, this is not a class action suit, and it may find its way to a confidential settlement before a final verdict, but if it does not, the outcome will be interesting. We will be providing updates as they unfold.

Illustration Restrictions Placed On Some John Hancock Inforce Policies

In the past we have written about limitations on obtaining ledgers to manage inforce life insurance.  In one instance the inability to provide in-force ledgers based on “current assumptions” was a precursor to a cost of insurance (COI) increase.

Our servicing team recently received notice that due to a “temporary” situation John Hancock cannot provide inforce ledgers on its Performance UL Policies issued in particular states from 2003 to 2010.

According to the information received from the carrier, they are unable to provide this information because “regulatory standards that govern illustration practices…prevent us from illustrating currently payable amounts based on our current non-guaranteed elements.”

John Hancock is “reviewing the non-guaranteed elements applied to these Policies because emerging experience has differed from the current assumptions which are reflected in the illustrations” and it expects the review to be completed “in the first half of 2017.”

The carrier notes that if the review results in “changes to Non-Guaranteed Elements such changes will not take effect before the policy anniversary immediately after the completion of the review.”

While we do not wish to speculate on the future actions of a highly rated and respected carrier, we will be closely monitoring the situation.

Second Amended Complaint Filed In The Brach Family Foundation Lawsuit Against AXA For Cost Of Insurance Increase

Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.

The 35-page document expands and adds to the original 18-page Class Action Complaint filed February 1 of last year, and follows on the heels of two unrelated lawsuits filed against AXA last week.

The suit, brought on behalf of the foundation and “similarly situated owners” of Athena Universal Life II policies subjected to the COI increase, alleges the increase was “unlawful and excessive” and that AXA violated “the plain terms” of the policy and “made numerous, material misrepresentations in violation of New York Insurance Law Section 4226.”

The rate hikes, which were applied in March of last year, were targeted to a group of approximately 1,700 policies issued to insureds with an issue age of 70 and up, and with a policy face amount of $1 million and up.  Since the increase was focused on this “subset”, the suit alleges that the increase was unlawful because the policies require that if a change in rates occurs it must be “on a basis that is equitable to all policyholders of a given class.”   The suit points out that there is no “actuarially sound basis” to treat policyholders differently simply because one may be 69 and one 70 at issue age, or because one may have a policy with a face amount above or below $1 million. The suit also points to actuarial studies that indicate there are actually “lower mortality rates for large face policies.”

The suit notes that there are six “reasonable assumptions” that COI changes can be based on: expenses, mortality, policy and contract claims, taxes, investment income, and lapses. AXA has stated that the COI increase was based on two of those: investment experience and mortality.

In order for the increase to be “based on reasonable assumptions” for investment income, the increase has to “correspond to the actual changes in investment income observed,” according to the lawsuit, which points out that “since 2004, there has been no discernible pattern of changes in AXA’s publicly reported investment income” that would “justify” any type of COI increase.

AXA defended its increase, in part, by stating that insureds in these policies were dying sooner than projected. However, the lawsuit claims that “mortality rates have improved steadily each year” since the policies were issued.   According to the lawsuit, the Society of Actuaries has performed surveys comparing observed mortality of large life insurance carriers to published mortality tables and has found that the “surveys have consistently showed mortality improvements over the last three decades, particularly for ages 70-90.”  The suit points out that AXA informed regulators in public filings as late as February 2015 that it “had not in fact observed any negative change in its mortality experience,” and answered no when asked if “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience.”  When questioned whether there may be “substantial probability” that the illustrations used for sales and inforce purposes could not be “supported by currently anticipated experience,” the carrier again answered no.

The suit alleges that if AXA’s “justifications” for the COI hikes are valid, “then AXA applied unreasonably extreme and aggressive haircuts to the 75-80 mortality table when setting original pricing of AUL II, and these pricing assumptions were designed to make AXA’s product look substantially cheaper than competitors’ and gain market share” and by doing so, AXA engaged in a “bait and switch” which resulted in “materially misleading illustrations, including all sales illustrations at issuance” in violation of New York Insurance Law Section 4226(a).

By focusing the increase on older aged insureds, the suit alleges AXA “unfairly targets the elderly who are out of options for replacing their insurance contracts” and forces the policyholders to either pay “exorbitant premiums that AXA knows would no longer justify the ultimate death benefits” or reduce the death benefit, lapse or surrender the policies.  According to the lawsuit, any of these actions will allow AXA to make a “huge” profit from the “extraordinary” COI increase.  According to the lawsuit, AXA originally projected that the COI increases, which ITM TwentyFirst has noted ranged from 25-72%, would increase “profits by approximately $500 million.” The lawsuit also notes that in its latest SEC filing, the carrier said that “the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings,” which the suit points out is “in addition to the profits that management had initially assumed for the COI increase.”

For a copy of the Second Amended Class Action Lawsuit in the case, contact mbrohawn@itm21st.com

Two More Lawsuits Filed Against AXA For Cost of Insurance Increases

Two lawsuits were filed one day apart last week against AXA Equitable Life Insurance Company for cost of insurance (COI) increases in its AXA Equitable Flexible Premium Universal Life Athena II policies. We “looked under the hood” of the AXA policies affected by these cost increases back in November of 2015. The increases were limited to those policies originally issued to people age 70 and above with a policy face value amount of $1 million or more, which factored into the substance of both lawsuits. There are now at least three lawsuits filed against AXA, including one we wrote about back in February of last year.

The first suit, filed January 18 in Arizona (Wenokur v AXA Equitable), accuses AXA of “improperly targeting a subset of policyholders who exercise their contractual rights to keep their accumulated policy account values as low as possible and pay flexible premiums.” According to the suit, the “exorbitant” cost increases were designed to force policyholders to “take one of two unsavory courses of action”; either pay increased premiums that the carrier “knows would no longer justify the ultimate death benefits” or surrender or lapse their policies.

Though AXA stated the increase was “warranted” because “affected insureds are dying sooner than AXA anticipated,” the suit points out that in a regulatory filing in February of 2015, the carrier answered no to the question asking whether its “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience,” and also pointed out that “mortality trends for the affected insureds have improved substantially since the time the policies issued.”

The lawsuit states that AXA “violated the terms of the policies” by “targeting only a subset of a risk class” and by basing the increase on unreasonable assumptions, breached the contract. Though AXA based the increase at least partly on expectations of “investment experience” in the future, the suit points out that investment experience is not a listed factor that may be considered for increasing COI rates, though “investment income” is, but “even if AXA’s investment income has changed, this factor cannot justify inflicting a COI increase solely on the subset of AUL II policies upon which AXA has sought to impose the COI increase (those with higher issue-ages and face-amounts).”

The second suit (Hobish v AXA Equitable), filed the next day in the Supreme Court of the State of New York, accuses AXA of “breach of the terms of the policy, deceptive business practices, and excessive, unconscionable and unlawful premium increase.”

The insured was issued the policy at a standard nonsmoker rating class. According to the suit, the policy contract stated that any changes to interest rates, charges, or other deductions would be on a “basis that is equitable to all policyholders of a given class.” When contacted by the insured, the carrier stated the cost increase would apply only to a class of insureds “with issue age of 70 and above and with a face amount of $1 million and above.” According to the lawsuit, nowhere was that class identified. The only policy class that was identified was the insured’s rating class of standard non-smoker. “Nothing in the policy permits AXA to imposed a COI increase based on the issue age or face value of the policy,” according to the suit.

The lawsuit also accuses AXA of deceptive business practices in violation of New York business law since they targeted consumers aged 70 and “misled” these consumers “into believing they would not be targeted for premium increases” that were “not applied generally and equitable to all members of a designated class.”

The suit cites the “predatory increase” in the cost of the policy as a “flagrant tactic to increase revenues and to drive aging individuals out of their policies.” In this case, the plaintiffs surrendered the policy on the insured, then age 92, “under protest” four months after the cost increase took effect. They received $412,274 as surrender value for the $2 million policy, after funding the policy with a total of $913,804 in premium payments.

For copies of both of these lawsuits, email mbrohawn@itm21st.com

Class Action Lawsuit Filed Against Lincoln National For COI Increases In Jefferson Pilot Policies

A class action lawsuit was filed last week in the Eastern District of Pennsylvania against Lincoln National Life Insurance Company on behalf of the owners of Jefferson Pilot-issued, JP Legend 100, 200, 300 and 400 series life insurance policies.   Lincoln National purchased Jefferson Pilot in March of 2006.

We wrote about this COI increase in August of 2016.   The announcement from the carrier at that time noted COI changes, stating that while most of the changes were increases, there were some decreases, “reflecting Lincoln’s commitment to acting fairly and responsibly.”

The class action lawsuit alleges the COI increase breached the contracts underlying the policies in several ways.  First, the “increases were based on non-enumerated factors” since “the 3 factors that Lincoln relies upon to justify the increase could not possibly justify an increase of the size” of the policies in question.  Those three factors included “its estimates for future cost factors of investment returns, mortality assumptions, and reinsurance costs.”  According to the suit, the carrier’s “expectations of future investment returns could not reasonably be materially lower than what Lincoln originally expected—and certainly not nearly so much lower as would be need to justify” the stated increases of “50-90%,” which are in line with the ITM TwentyFirst analysis of these policies in portfolios we manage.  The suit points out that, in filings from 2010 to 2014, Lincoln stated, “It expects mortality experience to improve.” The lawsuit also notes that “Mortality (normally the most important element in COI charge rates) has continuously improved nationwide since the policies were issued.”  Reinsurance costs “cannot provide material support for the increase, and reinsurance costs are not an enumerated factor for an increase,” according to the filing.

Second, the suit alleges that cost increases were not designed to respond to expectations but to recoup losses.  The policy contract states, “[R]ates will be based on our expectation of future monthly interest, expenses, and lapses,” which “forbids COI increases that are based on a carrier’s desire to increase profits or to make up for past losses,” according to the lawsuit. The lawsuit also indicates that Lincoln admitted they were focused on the past, not the future, since they pointed to a “decade of persistently low interest rates” and the “recent historic lows” to provide a rationale for an increase when the costs were announced.

In addition, the suit points out that the cost increases were not uniform “across insureds of the same rating class” and notes “COI rates being higher when the insured is 98 years old than when she is 99.”   According to the suit, the “strange and illogic shape” of the cost increase “could not possibly have been replicated for every one of the same rating class,” which violates the contract provision. This provision states, “any change in the monthly cost of insurance rates used will be on a uniform basis for Insureds of the same rate class.”

The lawsuit also points out that, by refusing to provide an illustration while the policy was in the grace period, Lincoln breached the contract. During the grace period, the policy is still considered to be in force, and the contract language states that the carrier would, if asked, “provide, without charge, an illustration showing projected policy values based on guaranteed as well as current mortality and interest factors.”

The suit seeks damages and court costs, along with reasonable and necessary attorneys’ fees, an injunction against the increase, treble damages, and “such other relief as this Court may deem just and proper under the circumstances.”

For a copy of the lawsuit, contact mbrohawn@itm21st.com.