toli review fiduciary issues helping your client expanding your practice

TOLI REVIEW

Fiduciary IssuesHelping Your Client

Expanding Your Practice

www.outsourceins.com

Trust Owned Life Insurance

A Fiduciary Storm is Brewing for:

• Institutional Trustees

• The “Brother-in-Law” Trustee

• The Advisor


Trust Owned Life InsuranceWho is the Trustee?

• 80% are Non-Professional Family Friends

• 20% are Corporate and Professional Trustee’s Banks Trust Companies Attorneys CPA’s Financial Advisors


Trust Owned Life InsuranceA Big Asset to Ignore

In Young Families, life insurance may equal 3 to 10 times net worth

In Senior Estates, life insurance may equal 25% to 50% of net worth


Will the proceeds of the trust-owned life insurance trust

be available when needed?



Trust Owned Life InsuranceQuantifying the Risk

For Example, if you are Trustee for 100 policies, on average you have:

• Total Death Benefit – $127,099,600

• Premium – $1,466,800

• Cash Value – $11,118,300

• 27 Policies will lapse worth $34,316,892

(Based on 2006 Investment Scorecard, Inc. Insurance IQ)


Trust Owned Life InsuranceQuantifying the Risk

• Lost Guarantee Provisions – $4,448,486

• Death Benefits without any or full extended maturity projection – $103,840,373

• Policies not projected to last past life expectancy – $12,328,661

• Policies with outstanding loan balances – $8,515,673(Potential Death Benefit Liability)

• Policies with suspended premiums– $187,750 in annual suspended premium

• Policies rated C, D, F or U – $52,823,940


Is the policy still

providing the coverage

for the best value

(i.e. performance)?



Trust Owned Life InsuranceIs Life Insurance a Lifetime Purchase?

• Have you refinanced your house?

• Have you replaced your old TV?

• Have you replaced your computer?

• Have you reviewed your life insurance?


Trust Owned Life InsuranceOld Generation of Policies

Problems:1. Poorly Performing Policies

2. Higher cost of mortality

3. Policy Design was less flexible

4. Existing loans or low cash value

5. Needs have changed

Opportunity:• Improve cost / benefit by replacing

• Sell policy in secondary market

• Refinance the policy

• Ownership and restructure


Trust Owned Life Insurance Other Policy Issues

1. Incorrect policy ownership

2. Term insurance period expiring

3. No conversion right on term insurance

4. Unknown loans against policies

5. Poor financial ratings of carrier

6. Company sold or merged

7. Declining interest rates


Trust Owned Life InsuranceWho Advises the Client to Review?

CPA? Not Likely

Trustee? Uninformed

Agent? 40% are Orphans

Attorney? The Trusted Advisor

Do you have a fiduciary liability?


ASS U ME ?

“I assumed the client spoke to the agent.”

“I assumed the premium had been paid.”

“I assumed it was regularly reviewed.”

“I assumed the insurance company notified the client of declining performance.”

“I assumed…”



Trust Owned Life InsuranceTOLI is a Hot Topic

Midwest Trust Company settles out of court for $10,000,000. The policy lapsed and the insured was insurable.

American Banker’s Association has made TOLI a new priority.

Trusts and Estates magazine has published articles on TOLI recently.


Trust Owned Life InsuranceAs Your Client’s Trusted Advisor…

1. What is your legal obligation?

2. What is your ethical obligation?

3. How can you improve your practice and your income?


Trust Owned Life Insurance Adding Value to Client Relationship

1. Help to identify potential problems that don’t involve document drafting.

2. Help to save money or create profit opportunities outside of “tax savings”.

3. Create good will by showing you care, that you go the extra mile.

THIS CREATES GREATER CLIENT TRUST AND REFERRALS



A recent study found that 75% of trust-owned life insurance policies could support at least a 40% increase in death benefit at no additional cost, or maintain the same death benefit at a 40% cost reduction:

A study of a large portfolio of TOLI [Trust Owned Life Insurance] policies held by a cross-section of bank trustees indicated a 75% chance that the death proceeds payable to a trust, for the benefit of its beneficiaries, could be increased by 40% or more with no increase in planned funding. Or, alternatively, funding could be reduced 40% or more with no decrease in death benefits payable to the trust.

American Banker - February 3, 1998; Page 17; Volume 163; Number 22


75% OF Your Clients Can Benefit from a TOLI Review

Free insurance

Lower premium

Profit from sale



Trust Owned Life InsuranceCase Study

New Policy Pricing Models

Existing Policy: Paid up – No premium

$332,000 death benefit guaranteed

Cash value $181,000.

Replacement Policy: 1035 existing cash value

No more premiums

$824,000 death benefit guaranteed

~ NO COST TO CLIENT ~



• Existing $15 million of coverage

• Carriers: AA and AAAAmerican GeneralHartfordConnecticut General

• Age of policies: 5 – 8 Years old (Purchased in her 70s)


You would assume no problem, right?

Female Age 81


Policy Review showed:

• If premiums continued without increases, then all policies will terminate in 3-8 years

(Age 84-91).

• To keep existing coverage in force to age 95 required 82% premium increase, i.e. $542,000 to $897,624



Real Cost

Premium

Current

$542,000

Increase

$897,624

+ Gift Tax @ 50% $271,000 vs. $448,812

$813,000 $1,346,436

Effective premium increase of

$533,436 annuallywww.outsourceins.com


Solution:

Save $428,000 premium annually and guarantee coverage to age 120



Benefit AmountCurrent

Premium *Premium

Required **ReplacementPremium ***

Savings

American General 3,000,000$ 112,000$ 185,000$ 89,000$ 96,000$

American General 3,000,000$ 112,000$ 185,000$ 89,000$ 96,000$

Connecticut General 4,000,000$ 137,000$ 220,000$ 115,247$ 104,753$

Connecticut General 2,000,000$ 69,000$ 96,624$ 57,624$ 39,000$

3,000,000$ 112,000$ 211,000$ 118,000$ 93,000$

15,000,000$ 542,000$ 897,624$ 468,871$ 428,753$

* Coverage will cease in 3 - 8 years

** Premiums required to keep current policies in force to age 95

*** Solution: New Policy premiums to guarantee coverage to age 120

Company

ITT Hartford

Total


How is this possible?

Death Benefit Existing Policy Cash Value Life Settlement Market

$2,000,000 Connecticut $24,249

$4,000,000 Connecticut $99,719

$3,000,000 Hartford $112,500

$3,000,000 American General $94,183

$3,000,000 American General $94,183

$536,844 → → → $2,500,00

Increase in Cash Value of $1,963,156

Tax Treatment of the

“Newfound” $1,963,156

No Taxes Due

In this case, total premiums exceeded the total purchase price ($2.5M), so there was no gain. (Premiums Paid = Basis)



Underwriting

Applied to 27 major companies - Only ONE gave a Standard Offer

12 Declined

7 Offered Table 4+

5 Offered Table 3

2 Offered Table 2



This Works For:

• Policies held in trusts for Estate Planning

• Old Split-Dollar Plans

• Buy-Sell Policies

• Target Market: 70+



Trust Owned Life InsuranceFiduciary Duty

“… it is the duty of the trustee of a trust containing as one of its assets alife insurance policy, to examine regularly the question the Uniform Act’sphilosophy: whether that policy should be sold under a life settlement, andthe proceeds thereof invested in assets providing a more immediate return…” - Dean Edward Miller, Banking Law Journal May ‘02

“There is clear evidence that suggests that life insurance professionals have a duty to inform policy owners of the availability of the life settlement option even if it is contrary to the insurer’s interest. Trustees and other fiduciaries must closely monitor the performance of life insurance policies held in trust to insure that they are meeting the objectives of the trust. Failure of a member of either profession to do so may subject him to legal action for failure to exercise the required level of due care.” - Robert P. Copeland, J.D., M.B.A., Elder Law and Estate Planning, Attorney and Author www.outsourceins.c

om

Individual, Corporate, and Trustee

policyholders can raise money

by treating their insurance

coverage as an asset.

Trust Owned Life InsuranceLifetime Settlement Option


Trust Owned Life InsuranceInsurance Product Development

Life Insurance Annuity


•Annuity Renewable

•Level Term (10/15/20/30 yr)

•Return of premium Term

•Universal Life (fixed)

•Variable Universal Life

•UL with Guaranteed No Lapse

•Variable with Guarantees

•100% First Year Cash Value

•Cashectomy Policy

•Sliding Scale Premium

•Guarantees with Catch Up Provisions

•Return of premium Universal Life

•Fixed Return

•Variable Return

•Short Term

•Longer term

•Flexible Withdrawal Options

•Variable with “Guaranteed Flow”

•Variable with “Ratchet”

•Annuities / Long Term Care

•Hybrids

•Single Life

•Joint Life

•Lifetime with Life Certain

•Fixed Return

•Variable Return

•Rated Annuities

•SPIA with Death Benefit

•SPIA with Immediate Returns

Term

Whole Life Deferred Annuity SPIA(Single Premium Immediate Annuity)

Life Settlement

Life SettlementWhat is the Value of a Life Insurance Policy?

1. Cash value?

2. Surrender value?

3. Rev. Proc. 2005-25 value?

4. Settlement value?

5. Intepolated terminal reserve value?


Life SettlementHistory

1. Viatical Business of (early 90’s)AIDS Cases / Terminally Ill

2. Corporate Owned Life Insurance (late 90’s)Iacocca Example

3. Emergence of Capital MarketsCoventry

Berkshire Hathaway

European Capital


Life SettlementFuture

$160,000,000,000 (Billion) Market

Anticipates obsolete Life PoliciesIncrease in Exclusions

Unaffordable Policies

Declining Cost of Replacement Insurance

Arbitrage of Selling Old / Buying New


Life SettlementWhy Settle a Policy?

Policy No Longer Needed:

Beneficiary dies, “keyman” policy obsolete, children are grown

and independent

Policy is No Longer Efficient:

Replacement may be more cost efficient

Change in Tax Liability:

Increased exclusions, reduced estate tax, or estate tax repeal

Policy Objectives Change:

Client may be more concerned about long term care and could sell policy

and purchase LTC or annuitywww.outsourceins.com

Life SettlementFactors That Contribute to Settlement Value

• Policy Face Value• Insured’s Life Expectancy• Outstanding Loans• Policy Cash Value• Ongoing Premiums to Keep Policies In-Force• Competition Among Settlement Companies• Good Ol’ Fashioned Bargaining


Life SettlementHow much might a policy be worth?

Below 70 - Virtually No Market(Unless Serious Health

Issues)

Age 75 - 15% of Face Value



The shorter the life expectancy, the higher the pricewww.outsourceins.com

Life SettlementTaxation

Sale price = $200,000 (20% of Face)

$1,000,000 – Face

$50,000 – Basis

$60,000 – Cash Value

$50,000 Basis - no tax – return of premium

$10,000 Ordinary income – cash value gain

$140,000 Long term capital – sale price in excess of cash value


Life Settlement

Everyone over 75 should have policies appraised, reviewed and outline options for:

- Selling

- Refinancing

- Replacing


Improve Your Practice

Improve Your Practice1. Go through your files and identify all clients 70+ with life

insurance.

2. Send letter recommending a review of the estate plan in light of:

a) changes in exemptions.b) need for updating facts and circumstances.

3. When appointment is set, request that they bring their most recent existing life insurance billing statement and annual policy update because you want to confirm the coordination of the policy and the estate plan.

4. When they meet, do your normal review - Most are wanting to update the “squander clauses” anyway.



5. Ask for insurance “billing” and policy report, because it is a key element of the plan.

6. Ask:a) “When did you last have your policy reviewed?”b) “Do you know how this policy is performing?”c) “Old insurance products are like old

computers – obsolete and low performance.”d) Suggest they review the policy.e) Ask them to sign a release of liability that you

prepared for them related to any representations of their insurance.



7. Explain that they can have an agent review it or a “policy audit” by an outside service for $150 per policy if they don’t want to meet with an agent.

8. Give them a copy of:

Why You Need to Review Your Life Insurance Policy Available at: www.outsourceins.com

9. Ask them to send you a copy of the results of the review for your records.


http://www.outsourceins.com/

SUMMARY1. Don’t assume what your clients tell you about their insurance is

factual.

2. Eliminate potential fiduciary liability by getting a release.

3. Help your client by recommending a “policy audit”.

4. Integrate this into your practice.

5. Use this to revisit your largest clients and get referrals.


http://www.outsourceins.com

toli review fiduciary issues helping your client expanding your practice

Documents

life insurance quantifying

life insurance toli

insurance company

insurance iq

term insurance period

past life expectancy

policy issues

policy design