Updated 11/20/19 Originally posted 8/15/19
We recently wrote about remediation and the challenges that TOLI trustees have when managing a policy. Remediation is not just developing the best options for an under performing policy, increasingly it means maximizing the value of a policy that a grantor believes is no longer needed, or one whose expected funding has stopped. These decisions must be well-thought-out and every data point that can be gathered should be utilized in a process that prudently steers the choices made. Often the decisions made are not black and white, they are grey and while the outcome may not be controlled, the process can.
One tool that TOLI trustees need to become aware of is a life expectancy (LE) report. It grew out of the life settlement market where investors needed to gauge the expected lifespan of an insured and the premium costs until a benefit will be paid to calculate a fair purchase price for a policy that would enable them to make a profit on the investment.
It also provides a great tool for TOLI trustees attempting to make decisions about the management of a policy. The underwriters at ITM TwentyFirst determine the life expectancy calculation based on age, gender, lifestyle, smoking status, family history and medical condition (underwriting factors) to create the LE report. The life expectancy report typically includes the life expectancy estimate and can include the probability of mortality each year based on the insured’s specific underwriting factors. The best way to show the value of an LE report is through an example.
A trustee of a portfolio of three current assumption universal life (CAUL) policies totaling $10 million in death benefit has been informed by the grantor, a male, age 85, that no more gifting would occur to the trust. The trustee contacted the beneficiaries who informed the trustee they too were not interested in providing additional funding. The trustee was concerned about the possibility of policy lapses but wished to uphold his responsibility to maximize the benefit of the trust to the beneficiaries.
In force illustrations were obtained on all three policies assuming no further premium was going to be paid into the policies. In addition, a life expectancy report was obtained on the insured/grantor and the percentage chance the insured would be alive was plotted. The information was summarized in the spreadsheet below.
As seen in the spreadsheet, it was projected no premium would have to be paid on any of the policies until the 8th year when Policy #2, the $2 million policy would have to be funded. All the policies would be nominally funded, allowing policy cash value to run to near zero before funding the policies with a minimal amount to keep the policies in force. The last column shows an approximation of the percentage chance the insured would still be alive. The LE report obtained showed that the insured was expected to have passed away by the end of the 9th year. While the LE report is not precise, it can provide guidance, and in this situation, it gave the trustee comfort that, at least for now, nothing should be done to any of the policies in the trust.
Using an LE report adds a data point to a prudent process. The key to mitigating liability is in the process, not the outcome. A great example of that is shown on page 127 of the TOLI Handbook, a 155-page guide for TOLI trustees and anyone dealing with life insurance.
To download your FREE PDF copy of the TOLI Handbook, go to www.TOLIHandbook.com.