Now Is the Time to Consider Outsourcing Your Irrevocable Life Insurance Trust Administration – Second of a Three Part Series

In our last entry, the first of this three part series, we outlined the TOLI outsourcing model, starting with onboarding the trust and policy, through the full administration process and touching on remediation. In this entry, we will discuss the advantages of outsourcing for the TOLI trustee.

For most trust companies and banks, trust owned life insurance (TOLI) is not a growth business. Federal estate tax changes over the last decade have dramatically affected the number of estates subject to the tax, and thus, the number of new trusts created. Certainly, there are reasons other than estate taxes to hold a policy in a trust, but the estate tax is the main driver. Will the estate tax change to favor the use of insurance trusts again? Maybe. But since this business line is also fraught with liability, perhaps now is the time for you to explore why partnering with an expert TOLI outsourcing firm delivers these and other long-term benefits:

  1. Provides A Team of Life Insurance and TOLI Administration Experts: Banks generally do not invest in hiring and training independent, in-house life insurance experts and TOLI administration professionals as the revenue generated from life insurance trusts does not support the business case. Your in-house team might be fantastic at a number of things, but are they proficient at managing life insurance, an asset class that has endured tremendous stress in the last decade? Do they know how to deal with a cost of insurance increase (COI) that more than doubles the carrying costs of a policy? Do they know when it makes sense to sell a life insurance policy and the advantages and disadvantages of the transaction? Do they understand the possible tax trap in policy loans and the liability to you, the trustee? Maybe, but just last week we heard of another trustee writing an almost 6 figure check because a trust administrator missed a liability that would have been obvious to a person trained in life insurance policy management. Today, more than ever, you need experts keeping an eye on your life insurance trusts. Every day, we help our clients (and in turn the insureds and beneficiaries) make prudent decisions related to policies which often save them substantial sums of money or avert problems that could result in negative impacts to coverage. Do you have independent experts in-house?
  2. Focuses You on What You Do Best: Your staff might not be life insurance specialists, but they have core competencies that can help generate revenue in your firm’s profit centers. With the stress on banks to reduce headcounts and focus on profitable business lines, outsourcing a non-core function can help banks achieve these results.
  3. Identifies and Reduces Your Overall Costs: For most TOLI trustees, the relative small number of trusts managed does not lend itself to creating the efficiencies that a focused outsource firm can. A trustee handling different types of policies from numerous carriers must stop to research an issue that an outsource firm handling tens of thousands of polices has seen and solved many times before. The variation and complexity of life insurance policies is easier to manage when you can scale the process. The ability to interpret the administrative details of a trust document, oversee the compliant management of the trusts and resolve trust and policy issues quickly and prudently is enhanced when the experts are focused on one business line – life insurance trusts. In most trust situations, life insurance has taken a back seat to other, more profitable business lines, and the true costs to administer a TOLI trust are not even known. An outsourcing firm provides a fixed known cost, typically far less than current costs incurred by banks administering life insurance trusts in-house.
  4. Mitigates Your Legal and Regulatory Risk: One of the most important factors in managing a business line is recognizing and understanding inherent risks. TOLI is no different. While it may be a small part of your revenue stream, it is a major source of potential liability. When a business line that generates a $1,500 to $3,000 annual fee can lead to six or seven figure settlements, it is time to take notice. By outsourcing you can partner with experts in the field and benefit from their proven ability to plan and mitigate potential risks. Furthermore, with increasing regulatory oversight and compliance requirements, having a proven team and process helps avoid unnecessary pitfalls.
  5. It Brings Peace of Mind: Most trustees we speak with see TOLI not as a growing business line but as a growing liability – with good reason. The low interest rate environment, market volatility, and cost of insurance increases and we have seen in the last five years has made managing life insurance harder than ever. Further, retaining professionals in-house is not an option based on the economics.  Outsourcing your TOLI trusts to a firm that focuses on that one asset should help bring peace of mind. Once when we asked how we were doing on a call with a client, the head of compliance for the firm responded, “you are doing great, I sleep well at night.” At the end of the day, isn’t that all you really want?

In our last entry, we will review policy remediation services, the weak link in most TOLI trust offices. We will show actual cases where we saved grantors hundreds of thousands of dollars on cases that would have clearly created liability for the trustee. If you are TOLI trustee, it may be our most important blog entry ever.

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

A Possible Tax Law Change in 2017 May Lead to Another Use for ILITs

Earlier this year, the Senate Committee on Finance voted to kill a strategy used to greatly enhance the value of an Individual Retirement Account (IRA). Permitted since 1987, the so-called “Stretch IRA” plan allows an IRA beneficiary to take distributions from an inherited IRA out over his or her lifetime, allowing the IRA account to grow tax-deferred and stretching the tax bill over many years. Many IRA owners have named children and even grandchildren as beneficiaries, making the strategy a useful tool to leverage assets to later generations.

This is not the first time the strategy has caught the eye of legislators, probably because it is projected the change will generate $5.5 billion in additional revenue over 10 years, but the Republican-led Committee, which includes 14 Republicans, voted unanimously, leading many to believe that, this time, action will be taken.

The change affects only non-spousal beneficiaries, who would have to pay taxes on an inherited IRA within five years of the owner’s death, with the first $450,000 excluded. However, the balance would be taxed at the beneficiary’s marginal rate. Surviving spouses could still stretch the taxes out over their lifespan or even roll the inherited amount into their own retirement plan.

With over $25 trillion in untaxed retirement accounts and $7.8 trillion in IRAs alone, (1) it is no wonder the government is looking to gather its tax money as soon as possible.

If the law is enacted, some financial advisers suggest converting to a Roth IRA. However, under the proposal, a Roth IRA left to a non-spousal beneficiary would also have to be distributed within five years, just like a traditional IRA. While the eventual Roth IRA distributions would be tax-free to the beneficiary, the conversion would be taxable to the IRA holder.

Another option that might provide more flexibility and greater leverage would be the use of an Irrevocable Life Insurance Trust (ILIT). As with the Roth IRA strategy, the IRA distributions to fund the plan would be taxable, but the life insurance death benefit could be passed on free of federal and state income and estate taxes.

According to Ed Slott, a noted IRA authority, life insurance makes sense. In an article just published in a financial planning magazine, he suggests, “Forget the stretch IRA. You’re better off taking the money out now, paying the taxes, and putting that money into a life insurance policy that will be tax-free when it’s cashed in. You could easily take a $300,000 IRA and turn it into a $1 million life insurance policy.” (2)

The next few years will provide challenges and opportunities for trust advisors to help clients rethink their financial plans and goals. ILITs will remain a viable tool for leveraging assets.


  1. From information provided by the Investment Company Institute, Washington, D.C.
  2. Stretch IRA: Are Its Days Numbered?, Financial Advisor Magazine (, December 27, 2016

John Hancock Hit With Class Action Lawsuit Over Cost of Insurance In Some Universal Life Policies

A class action lawsuit filed in the United States District Court in New York, alleges that John Hancock Life Insurance Company (U.S.A.) has forced policyholders to pay “unlawful and excessive cost of insurance (“COI”) charges,” as well as “unlawful and excessive premiums.”

According to the filing, policy provisions in the John Hancock policies referenced “specify that monthly cost of insurance (“COI”) rates “will be based on ”expectations of future mortality experience – and nothing else.”  In addition, the filing notes that the carrier “contractually promised to review those mortality-only based COI rates at least once every 5 policy years.”  Based on those policy provisions, the suit further alleges, John Hancock agreed to “decrease COI rates on its customers when there is an improvement in mortality.”

Noting that “nationwide mortality rates have declined significantly over the past several decades,” and that the carrier itself stated “in regulatory filings over the past 15 years that mortality experiences were substantially better than it expected,” the lawsuit is asking for “monetary relief for the COI overcharges that John Hancock has wrongly imposed on its customers.”

The suit also charges that the carrier collected “unauthorized additional premiums under an Age 100 Waiver of Charges Rider (“Age 100 Rider”) included in certain John Hancock life insurance policies.”  The Age 100 Waiver of Charges Rider states that after the insured reaches age 100 no additional premium will be collected on the policy.  According to the suit, there is an additional charge for this rider and the policy “sets the additional premiums that John Hancock could charge and the period of time in which these additional premiums would need to be paid under the Age 100 Rider.”  Those additional premiums could only be charged, according to the filing “during the years in which the underlying insureds were 32 years old or younger.  The policy did not provide for or permit John Hancock to charge any additional premium for the Age 100 Rider for insureds that were 33 years old and older.”  However, the suit alleges that “John Hancock charged plaintiff additional premiums for the Age 100 Rider even though the insureds were older than 32 years old.”  Those filing the suit seek “monetary relief for these impermissible additional premiums charged by John Hancock and paid by plaintiff and other similarly situated policyholders.”

The lawsuit, filed on December 21st is an interesting way to end 2015, a year in which a number of carriers raised COI rates on its policies.  ITM TwentyFirst will be following this case closely and reporting back as the case progresses.

Transamerica Now Making It Almost Impossible to Manage Their Life Insurance Policies

Managing life insurance is not an easy job in this historically low interest rate environment, especially with the unprecedented cost of insurance (COI) increases we have seen in the last few months. In one of our recent blogs, we highlighted one Transamerica policy our Remediation Department has dealt with. That policy’s premium jumped from $36,400 to $81,595 overnight. Hard to deal with policies like that…and hard to manage.

Now Transamerica is making it even more difficult to manage their policies. Yesterday we received an email from Transamerica that they will no longer run in force ledgers based on “current assumptions” on a specific group of Universal Life policies.  According to the carrier, they are no longer “able to run non-guaranteed rates on a number of in force products.” They told us that after “annual illustration testing” of their in force products, going forward they will only illustrate “the guaranteed future interest rate and monthly deductions,” on that group of in force policies.

Just so I am perfectly clear: This means that we literally cannot get an in force policy illustration that projects the policy values into the future based on what Transamerica is actually charging and crediting inside these policies. The only ledgers we can receive are based on guaranteed maximum charges and guaranteed minimum interest rate assumptions.

So how do we manage the policy? According to an email from Transamerica, we can request “a policy’s current accumulation value and monthly deduction amounts” and then “determine whether the current premium will sustain the policy until the next anniversary.”

Projecting past the end of the policy year is anyone’s guess, I assume. It is virtually impossible to fund a lifetime asset like life insurance efficiently with information that provides insight less than twelve months ahead.

The policies affected are not among those previously affected by the COI increase announced a couple of months ago. And Transamerica has told us that no COI increases are planned for this group. We will see.

At ITMTwentyFirst we manage over 800 Transamerica policies and our goal is to maximize the benefits to beneficiaries and policy owners. In fact, our clients, many of the top Trustees in the country, have a fiduciary duty to do just that.

What is Transamerica’s duty to its clients?

Ten Mistakes (We See) Many TOLI Trustees Make

At Insurance Trust Monitor, we have seen pretty much everything there is to see when it comes to life insurance management, yet monthly, sometimes weekly, we come across something we have not seen before. I understand that life insurance is a confusing asset to manage, and when you add in the tax and estate planning requirements around trust administration, I totally get it that trustees have a tough job. In our contacts with prospects and clients, we have found ten areas where we see the most problems when it comes to TOLI.  This list is generated from being in the place where we at ITM live: the trenches of TOLI trust/policy management.

Mistake #1: Failing to Understand Trustees’ Fiduciary Responsibilities

Fiduciary responsibility has been in the news lately, with an ongoing debate centering on the level of responsibility one has to a client based on one’s role, but it crystal clear that, as a TOLI trustee, you hold a fiduciary responsibility. The Uniform Prudent Investor Act (UPIA) provides clear guidance, telling TOLI trustees to “manage trust assets as a prudent investor would.” This is pretty broad language, but it does get more specific, instructing trustees to “review the trust assets and make and implement decisions…within a reasonable time after accepting” the asset. In other words, understand the policy and make sure it is appropriate. It goes on to say you must “invest and manage the trust assets solely in the interest of the beneficiaries,” a recurring theme of prudent fiduciary practices. The UPIA does give trustees the ability to “delegate investment and management functions,” which may be the most prudent step if required skills are not available. For those TOLI trustees who fall under the supervision of the Office of the Comptroller of the Currency, the OCC Handbook on Hard to Value Assets, put out in August 2012, provides guidance, some of which mirrors the UPIA. For example, the Handbook states that trustees are “responsible for protecting and managing the life insurance policy for the benefit of the beneficiaries.” Sound familiar? So does this…“A bank fiduciary must understand each life insurance policy that the trust accepts.” The Handbook not only says delegation is okay, it mandates it if the trustee does not have the skills needed, saying he or she “must employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company.” As in the UPIA, a trustee is directed to review the policy, first when it is initially brought in and then annually. In fact, even with states lowering their standards as they relate to life insurance policy management, the OCC Handbook points out that trustees under its jurisdiction still need to provide annual reviews on the policy, the “Reg. 9” reviews that all trustees are aware of.

Mistake #2: Failing to Price Your Services Correctly

A couple of years ago, ITM surveyed TOLI trustees and found that a third of the responders priced their TOLI services under $750 annually. About 15% were in the $250-500 range, and a couple charged nothing, preferring to provide the service as an accommodation. The majority of the respondents were in the $1,000-1,500 range, which is in line with running a profitable business, but those priced at $750 and below, and especially those acting as a trustee as an accommodation, should probably re-think their pricing. After all, there are real costs associated with the service. Competent administrative staff, focused legal counsel, and a life insurance specialist on board will make up the bulk of your costs, but you also must add in liability insurance and the costs of “mistakes” insurance may not cover, along with the cost of a centralized database system, the ever-increasing costs of “compliance,” and a management position to oversee it all. Then you begin to get an idea of the true costs of your service. I would suggest that the “sweet spot” of $1,000-1,500 is more than justified and, in fact, we are seeing pricing rise above that amount to $2,000, even $3,000 and beyond. If you are in the business, you should probably charge what you need to do a good job or get out.

Mistake #3: Failing to Adequately Understand the Trust Document and Policy When Taking in a Trust

Successful management of a life insurance trust starts at the beginning. Onboarding the policy and trust correctly sets the tone. The biggest mistakes we see include inadequate legal trust document reviews, resulting in administrative and even more costly errors; insufficient understanding of the policy; and, when understood, inadequate documentation of that understanding with the grantor. In addition, we often see sloppy general housekeeping, simple things like keeping complete and correct contact information for all those involved with the trust, including any advisors who can be called upon. Having an understanding of the personal “back stories” that drive the trust decisions also will be very helpful.

Mistake #4: Failing to Adequately Document a Prudent Process

According to the UPIA, a prudent decision is viewed “in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.” This should bring some comfort to the trustee who can document that a decision made was prudent at the time when it was made, because you should not be held liable if things go askew. However, too often, the documentation is insufficient. In some instances, there is simply no uniform process in place, no rigid method of documentation that all at your firm follow.  Other times, the understanding of the trust document or life insurance policy is not sufficient to render a prudent decision, and even if a prudent decision was made, a central depository had not been established and the memorialization of the decision making process is lost. As I mentioned in a past blog post, The Outcome Cannot Always Be (Completely) Controlled, But The Process Can, in any situation where liability is being reviewed, the focus is not so much on the outcome as on the process employed by the trustee. Many things outside of your control can affect an outcome, but if you are being accused of not living up to your TOLI duty, you had better be prepared to show the prudent practices that you employed. 

Mistake #5: Failing to Adequately Communicate With Both Grantors and Beneficiaries

Communication is the key to good TOLI trust administration. Without it, you create policy and administration difficulties, increase the chances of a negative outcome and your liability, and, ultimately, increase your costs. The most successful TOLI trustees are those who maintain an active dialogue with grantors and, when necessary, beneficiaries. Rhythmic communication about the policy is a must and, when possible, face-to-face or conference call reviews are beneficial. Too often, relationships with grantors consist only of a gift notice they look at as another bill. Reaching out to a grantor reinforces the validity and purpose of the trust. Beneficiaries need to be notified any time there is a change to the trust’s benefits. Court cases and settlements can be avoided if this simple rule is followed.

Mistake #6: Failing to Administer the Trust and Policy Correctly

Creating a consistent administration process begins with timing. Requesting gifts early, following up promptly, and understanding what to do if slow gifting will cause late premium payments is important. Templates and other efficiency tools will help you to create a profit center, but understanding how to deal with common policy and trust issues will mitigate your liability.  A centralized, dedicated system, committed and focused administrative staff, and complimentary legal and insurance specialists are all components of a successful TOLI administration system.

Mistake #7: Failing to Analyze Policy Options When Trust Goals Change

While TOLI trusts are irrevocable, changes do occur. Grantors stop funding, trust goals and/or death benefit needs change. A trustee must have the necessary skills to determine the best way to maximize a life insurance policy when changes occur. I understand that this is not easy; for example, assume an 86-year-old grantor decides that he or she is no longer going to gift to the trust. It is probable that, without the additional funding, the policy will lose value and eventually lapse. Only an enlightened trustee would be able to review options available to the trust, which might include keeping the current death benefit intact, lowering the death benefit, surrendering the policy, or selling it on the secondary market and investing the proceeds. This is not an easy analysis, but it must be done. I have run across trustees who have made these decisions with no analysis and no dialogue with the beneficiaries – a recipe for disaster. This is where unbiased life insurance advice is necessary to develop a prudent decision. Don’t forget to adequately document the reasons for your decision and get the necessary sign-offs from all pertinent parties.

Mistake #8: Failing to Realize the Real Client is the Beneficiary, Not the Grantor

It is easy to see the grantor as the client. After all, who is funding the trust and paying your fee?  However, as discussed earlier, the UPIA and the OCC Handbook are clear in defining your client as the beneficiary, and case law bears that out. In Paradee v. Paradee, the court ruled that “instead of evaluating what was in the best interests of the Trust, (the trustee) evaluated whether he could please his long-time clients,” who were the grantors. In Schwab et al. v. Huntington National Bank, the court ruled that the grantor of an irrevocable trust even lacked the standing to sue the trustee, a good reason to understand who your real client is. Another one is purely business: most trustees view life insurance trusts as a bit of a nuisance. Yes, they should generate a profit, but the real payoff comes when the benefit is paid, if the beneficiary keeps the funds with your firm. It’s best to start now to make sure that happens.

Mistake #9: Failing to Adequately Understand Policy Replacements

There are good reasons for a policy to be replaced, but often we see that trustees do not have a good grasp on whether a policy replacement makes sense. One example leaps to mind: a trustee passed a replacement policy on to us for review. The trustee believed that the new policy made sense based on some changes in the grantor’s situation.  However, when we looked into the policy, we found that though the agent had created an illustration that the policy’s “premium cost” was equivalent because of the assumptions used, the actual cost of the policy, principally the cost of insurance in the new policy, was four times that of the existing policy. In order to adequately protect the trust, the trustee needs to be able to decipher carrier illustrations and compare products, not an easy task. When the policy is reviewed, the trustee needs to have a document in the file that spells out the policy caveats and parameters, as well as the grantor’s funding obligations.

Mistake #10: Failing to Have Specialized Staff and Resources Focused on TOLI

By this time, it should be clear that the mistakes highlighted in this article stem primarily from either a lack of procedures in place, or a lack of the skillsets needed to manage this complex financial asset. As mentioned, staffing starts with a specialized administrator and includes focused legal counsel and unbiased insurance personnel. Compliance issues dictate the need for a person with oversight of the entire operation with audit capabilities.  A centralized database will also be needed, as all of the trust documents will have to be retained in a secure system for an extended period of time.

The blog above is an adaption of a free two-part webinar provided by Insurance Trust Monitor. The sessions provide CE credit for CTFA and CFP designations and include real-life case studies. The second session will be held Tuesday, May 19th at 1 PM CDT.  See for additional information. 


Max-Hervé George versus Aviva, a Quick Update

Recently, ITM posted a blog entitled, The Best Life Insurance Policy Ever . . . Unless Your Name is Aviva, which recounted the good fortune of Max-Hervé George, whose father had purchased a life insurance policy for him when he was a child. The policy guidelines effectively enabled a policy owner to manage the cash value in the policy by essentially backdating his investment decisions. The “crystal ball” policy was issued two decades ago by a company now owned by Aviva. Unfortunately, for Aviva, some believe that the policy’s value could surpass a billion dollars by 2020. From 1997 to 2007, the policy had a projected annual rate of return of 68 percent. If this is an indication of future returns, the Rule of 72 tells us the policy value will double again in just over a year.  And on and on……

*** Update ***  As I noted in the previous blog, Max won a round of litigation against the carrier. According to a press release I received on the case last week, this was based on a ruling by the French High Court, which ruled that Max had the “right to operate his . . . contract on its original terms and make effective, back dated fund switches.” In my earlier blog I mentioned that Mr. George is not only managing his contract, he is using a contract provision to add to the contract by borrowing money from European banks.

When I initially read about this case, I wondered how many of these policies were out there. Clearly, a life insurance policy that could double in value every year or so would be considered a liability for any financial institution. According to the press release I received, dated April 2, it appears the exact number is unknown, or at least Aviva is not letting on what that number is. At a general meeting held recently, “Aviva refused the request for greater transparency and (to) answer simple questions such as how many contracts are still in existence.”

One thing we do know—according to the press release, Nicolas Lecoq-Vallon, the French lawyer who already represents 30 clients with this type of policy, signed up 10 new clients in just the last two weeks.

With the number of policyholders seeking counsel growing, and the almost unlimited cash value potential, this is surely a case that is not going away. More updates to follow.