While the DOL fiduciary rule, which went into partial effect in June raises the bar for those advisors working with annuities and investments in retirement accounts, no corresponding federal regulation applies for life insurance sales in the trust-owned life insurance (TOLI) market.
New York state has the most stringent law about best standards for life insurance and annuity sales. The law, which will begin to take effect in August of 2019, exempts some types of life insurance transactions, including corporate-owned (COLI) or bank-owned (BOLI) life insurance and those dealing with the sale of life insurance in the secondary market (the state already has regulations dealing with life settlements). But the law provides strict guidelines when dealing with traditional life insurance sales to consumers, including TOLI sales.
The law requires any life insurance salesperson to “act in the best interest of the consumer” and any product recommendation must “be based on an evaluation of the relevant suitability information of the consumer” and reflect “the care, skill, prudence, and diligence that a prudent person acting in a like capacity… would use under the circumstances.”
In making any recommendation “only the interests of the consumer” can be considered and though no limitations are placed on compensation, the law requires that “compensation or other incentives permitted” should not “influence the recommendation.”
While a few other states, as well as some national insurance organizations are also mulling over similar regulations, today the TOLI trustee has an obligation to their customer that is much higher than a life insurance salesperson or advisor. In most instances a life insurance sale must only meet a suitability requirement, a low bar and this has created issues we at ITM TwentyFirst have seen firsthand – issues that could cause a TOLI trustee to write a check, or worse, wind up in court (and possibly write a bigger check).
In the past year, we had a prospect (who later became a client) write a high six-figure check to make a grantor whole for a policy replacement that occurred two years prior. The transaction, which we could not undo, put the trust in a worse position than the existing policy. The trustee, who largely because of that transaction later became a client under our Managed Solution program, had followed the advice of a local life insurance agent, a mistake on his part.
Policy replacements have become an area of increased liability for trustees. In the TOLI Handbook, available here as a free PDF download, we write about two replacement transactions. Either could have placed the trustee in hot water – and possibly a courtroom. One replacement, pushed hard by an agent who was also a good friend of the grantor would have replaced an existing policy in the trust with one with demonstrable costs four times as high over the lifetime of the policy, clearly violating Section 7 of the Uniform Prudent Investor Act (UPIA) dealing with “appropriate and reasonable” costs. In another replacement case, an agent advised a TOLI trustee to replace a portfolio of whole life contracts with a new equity index universal life policy that would have provided the trust with fewer guarantees and a death benefit worth $900 thousand less. The trustee has a duty to investigate any transaction, including all the options for the existing policy – in this case, the agent never reviewed any.
As a TOLI trustee, you have a fiduciary responsibility to ensure that every transaction – either a new policy sale or replacement is not only suitable for your client, but also in your client’s best interest. Until regulations change you will be sitting on the other side of the table from most life insurance salespeople.