TOLI Issues
Trustees Sued for Policy Mismanagement
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84% of professional trustees lack guidelines for managing TOLI.
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95% of professional trustees lack procedures for handling the asset allocation inside variable life insurance contracts.
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95% of all TOLI are no longer serviced by the original life agent.
Lack of industry knowledge and resources results in significant litigation exposure to the trustee. This exposure stems from the following facts:
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92% of existing TOLI can be restructured to provide 20% greater value.
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75% of restructured policies provide either a 40% increase in death benefit or a 40% reduction in premiums.
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1 of every 3 life insurance policies held in trusts will lapse prior to the death benefit payment.
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1. Mortality Underwriting and Life Expectancy projections are the cornerstone of proper policy management.
a. Premium payments are often mismanaged due to a lack of mortality underwriting and life expectancy projections.
b. AFG uses a proprietary method to estimate life expectancies, which involves extensive medical record review, actuarial assumptions, and appropriate monitoring.
c. Updated LE projections allow policy owners to potentially reduce premiums or discontinue payments altogether using the Cash Surrender Value.
2. Cost of Insurance (COI) may have increased since the policy was issued. For example, new mortality tables issued years ago may increase COI.
Implications of COI Increases
i. As COI increases, scheduled annual premiums also increase for the policy to sustain coverage for the originally planned duration period, which typically is up to age 90, 95, or 100.
ii. The planned duration period is always calculated incorrectly because of the lack of LE projections. Policy owners are unaware that the planned duration period can increase or decrease and doesn’t adjust premium payments accordingly, so he’s either overpaying or underpaying.
iii. LE projections should be changed annually.
iv. Since most Irrevocable Life Insurance Trusts (ILITs) insure seniors and own policies with higher death benefits, the COI increase warrants careful monitoring, dispute-defensible policy risk management evaluation, and premium adjustment to avoid potential litigation.
3. Interest rates, family circumstances, and economic factors have changed since the policy was issued, and are all causes for re-evaluation.
4. Unless reviewed and restructured, 25-28% of Universal Life policies expire early.
5. About 40% of in-force non-guaranteed TOLI policies are illustrated to lapse during the insured’s lifetime or within 5 years of the estimated life expectancy.
6. Restructuring and properly managing an existing policy is much more prudent than buying a new policy. 97% of replacement policies do not provide better value.
7. Life insurance illustrations are often inflated and unrealistic.
a. Trustees typically only use carrier-provided life insurance illustrations to track policy performance. However, the outcome shown in the illustration often will not happen.
b. Projected rates on cash value growth are usually too optimistic, because they are projected using the current dividend and credited rates being paid at that time, which may not occur.