Using Sophisticated Techniques to Manage Life Insurance Policies

Transcription

1 keeping trusts on track Using Sophisticated Techniques to Manage Life Insurance Policies A Session Specifically Designed for The ITM TwentyFirst University December 10, 2015 Presented By: MICHAEL BROHAWN, CFP, CLU Managing Director T: E: mbrohawn@itm21st.com Page: 1 of 12

2 Why Is It That So Many High Profile Buidlings Are Named After Insurance Companies? Top 10 Life Insurance Carriers Have Over $3.75 Trillion in Assets. MetLife With Over $900 Billion in Assets. Very low percentage of life insurance policies actually pay out. Are we over paying for those that do? What is the difference between $1M of Apple stock and $1M Death Benefit passed on to the next generation? Page: 2 of 12

3 Term Whole Life Current Assumption Universal Life Secondary Guarantee Universal Life Variable Universal Life Index Universal Life Whole Life Insurance The original black box. Designed so that at maturity the cash value was equal to the death benefit. Though used in Trust Owned Life Insurance (TOLI) has fallen out of favor. Why have cash value? Whole Life NUMBERS In The Later Years PY Cash Surrender Value Death Benefit Difference 41 $18,810 $828,013 $1,000,000 $171, $18,810 $846,229 $1,000,000 $153, $18,810 $864,846 $1,000,000 $135, $18,810 $883,873 $1,000,000 $116, $18,810 $903,318 $1,000,000 $96, $18,810 $923,191 $1,000,000 $76, $18,810 $943,501 $1,000,000 $56, $18,810 $964,258 $1,000,000 $35, $18,810 $985,472 $1,000,000 $14, $18,810 $1,000,000 $1,000,000 $0 At Death What Does the Trust Get? Where Does the Cash Value Go? The Goal of a TOLI policy is to MAXIMIZE the Internal Rate of Return (IRR) of the Policy for the Beneficary Page: 3 of 12

4 Current Assumption Universal Life Secondary Guarantee Universal Life Variable Universal Life Index Universal Life (Current Assumption) Universal Life When interest rates skyrocketed in the early 1980 s this product was created to take advantage of the high interest rates of the time. The policy was totally transparent and completely flexible. Insurance was no longer a black box; you could see every cost in the policy. Unfortunately the high interest rates did not hold up. (Guaranteed Death Benefit) Universal Life Once the Current Assumption UL policies began to fail, the carriers created guaranteed UL policies no matter what happened to crediting rates in policy the policy would persist as long as you paid premium in full and on time. Variable Universal Life Before Variable Life was introduced the carrier had always invested the cash values in the policy. Now the policy owner could invest the money and since the money could be invested in equities, the policy owner could now lose money. Indexed Universal Life After the market correction of 2008, Indexed Universal Life became more popular because it provided a floor for limiting loses while capturing much of the upside. Flexible UNIVERSAL Monthly Charges Deducted From The major difference in Universal Life was the Simplicity and Transparency of the policy. With Universal Life Every Cost Was Broken Out For the Policy Owner To See The policy becomes an Excel Spreadsheet Ending Accumulation Value on 6/8/11 $147, Minus Expense Charges of $4 - $4.00 Minus Cost of Insurance (COI) - $1, Plus Interest Credited + $ Equals Ending Accumulation Value on 6/8/11 = $145, Page: 4 of 12

5 Variables Cash Value Investments: Current Assumption UL (CAUL): Based on Fixed Interest rates. Variable UL (VUL): Based on Separate Accounts that can lose money. Indexed UL (IUL): Based on returns in an Index, with a floor and a ceiling. Policy Expenses The Cost of Insurance (on a per thousand basis) goes up annually, or even monthly, as the Insured ages. Cost of Insurance (COI): goes up with age Rider charges Surrender charges Policy loads Investment fees and exspenses Loan interest Administration charges M&E Risk charges What is vs. What is Cost? Typically, when you purchase a Universal Life policy you get a suggested level premium based on a projected goal (run to maturity assuming a certain crediting rate for a CAUL or IUL, or gross return for a VUL policy.) As you manage the policy you get inforce ledgers which are based on a goal, which can be the same goal or can be a different goal. With each type of illustration (sales or inforce ledger), you will get a level premium solve. Level Solve vs COI Whether you are receiving your illustration at point of sale or as a re-projection when policy is older you will typically get a level premium solve that initially is more than the actual cost of the policy. While that type of illustration works in many situations, there are situations where the level premium is not the most efficient funding. This is where Optimization Comes In You are not working with the illustration the carrier gave you, you are developing your own payment schedule, designed to keep the policy in force for a minimal cost. Optimization is a method of maximizing value for the Beneficary on specific TOLI cases. Where Optimization Works Best: In older aged cases. When the health of the insured is diminished Page: 5 of 12

6 Concept to Understand Net Amount at Risk The advantage of paying a higher level premium is that the policy builds cash value and that lowers the Net Amount at Risk and lowers the long term costs of a policy. The Goal when managing a TOLI policy (and the fiduciary responsibility of the trustee) is to maximize the value of the policy for the beneficiary. As mentioned, when we order inforce illustrations we typically receive an illustration for a level premium to run to a certain point, typically an age late in life or maturity. For most ages and in most instances this makes sense. However, if we combine a Life Expectancy report with Policy Funding Optimization we can often save the client money and maximize the rate of return in the policy. What is Life Expectancy (LE) Report? ITM TwentyFirst underwriters estimate the average number of years a person is expected to live based on their age, gender, lifestyle, smoking status, family history and medical condition ( Underwriting Factors ). The life expectancy report includes the life expectancy estimate as well as the probability of mortality each year based on the insured s specific Underwriting Factors. See page 9 of this Handbook for a Sample Life Expectancy Report What is needed from your client to get a Life Expectancy Report? All that is required is a signature on a HIPAA (Health Insurance Portability and Accountability Act) form. No doctor visit, paramed exam or medical consultation is needed. All information is held in strict confidence. Page: 6 of 12

7 How an LE Report Can Helped a Trustee Example 1: Trustee with 88 year old Grantor s with a policy that will no longer be funded. $1.5M policy with $562k of death benefit. Grantor s want to surrender policy for the cash value. What If LE Was 5 Years What If LE Was 10 Years Year Policy Year Ages Surrender Value Invested at 4.51% Surrender Value Invested at 6% Policy Outcome at Reduced Death Benefit of $1,500,000 Policy Outcome at Reduced Death Benefit of $1,075, $587,655 $596,033 $1,500,000 $1,100, $614,158 $631,795 $1,500,000 $1,100, $641,856 $669,702 $1,500,000 $1,100, $670,804 $709,884 $1,500,000 $1,100, $701,057 $752,478 $1,500,000 $1,100, $732,675 $797,626 $1,500,000 $1,100, $765,719 $845,484 $1,500,000 $1,100, $800,252 $896,213 $1,500,000 $1,100, $836,344 $949,986 $1,500,000 $1,100, $874,063 $1,006,985 Policy Lapse $1,100, $913,483 $1,067,404 $1,100, $954,681 $1,131,448 $1,100, $997,737 $1,199,335 $1,100, $1,042,735 $1,271,295 $1,100, $1,089,763 $1,347,573 $1,100, $1,138,911 $1,428,427 $1,100, $1,190,276 $1,514,133 $1,100, $1,243,957 $1,604,981 $1,100,000 Options (Not Necessarily All Options) 1. Surrender policy and invest the difference at 4.51%, have $1.1M at age 103, $1.5M at age 110; at 6%, have $1.1M at age 99, $1.5M at age Keep current death benefit of $1.5M and no premium paid, policy runs to age 98 and lapses under current assumptions 3. Reduce death benefit to $1.1M, policy runs to maturity 4. Sell the Policy Example 2: Trustee with a Male Grantor Client, 85 years old with a portfolio of three Universal Life policies. Policies have been very well funded over the years, but Grantor has decided not to gift to trust any more. Total of $10M in death benefit. Inforce illustrations under current assumptions, assuming no more premium paid, were run. 9 Years Before Any is Needed Year Age Projected Out of Pocket Contributions - Pay $0 Until Point of Lapse Policy #1 Policy #2 Policy #3 $5,000,000 policy $2,000,000 policy $3,000,000 policy Annual Cumulative Annual Cumulative Annual Cumulative Total Cumulative Life Expectancy Report % Total Deaths $0 $0 $0 $0 $0 $0 $0 5% $0 $0 $0 $0 $0 $0 $0 12% $0 $0 $0 $0 $0 $0 $0 29% $0 $0 $0 $0 $0 $0 $0 46% $0 $0 $0 $0 $0 $0 $0 64% $0 $0 $0 $0 $0 $0 $0 76% $0 $0 $0 $0 $0 $0 $0 85% $0 $0 $0 $0 $0 $0 $0 91% $0 $0 $17,650 $17,650 $0 $0 $17,650 97% $35,000 $35,000 $17,650 $35,300 $0 $0 $70, % $70,000 $105,000 $17,650 $52,950 $18,000 $18,000 $175,950 NA $70,000 $175,000 $17,650 $70,600 $35,675 $53,675 $299,275 NA $70,000 $245,000 $17,650 $88,250 $35,675 $89,350 $422,600 NA $70,000 $315,000 $17,650 $105,900 $35,675 $125,025 $545,925 NA $70,000 $385,000 $17,650 $123,550 $35,675 $160,700 $669,250 NA At 9 Years Little Chance Insured Still Alive The Life Expectancy Report gives a Trustee another data point for the trust file. It does not provide an answer, but does provide guidance to the Trustee attempting to make a prudent decision about a valuable asset where answers are hard to find. Page: 7 of 12

8 Example of a Level Solve Inforce Ledger A $6M Flexible Current Assumption Universal Life policy issued to a 75 year old female. The policy is designed to pay premium to age 100 and if the policy is still inforce at age 100 then the policy would continue on to age 115 when it would mature for full death benefit. SIDE NOTE: When reviewing policies, especially on older aged individuals, make sure that you are not paying too much. In some instances we have come across policies where funding could have stopped but did not. Example: A Guaranteed Universal Life policy that was designed so that after 10 years of premium payment, no additional premium would be needed. After 10 years of premium payment the death benefit was guaranteed. We took the policy over in the 12th year. We alerted the Trustee that premium did not have to be paid that year, but premium had been paid in the prior year, the 11th year. It was not needed. Using the current inforce illustration and comparing with the optimization outcome we can decide on the best funding pattern, but only after comparing with a with a Life Expectancy report. Optimized Carrier Provided Minimum Advantage/ Disadvantage LE Report Annual Annual Cumulative Annual Cumulative Optimization Percentage Crossover Year Policy Year Age s s s s vs. Carrier Total Deaths 7 82 $8,308 $8,308 $131,164 $131,164 $122, % 8 83 $91,949 $100,258 $262,329 $393,493 $293, % 9 84 $108,936 $209,194 $262,329 $655,822 $446, % $133,910 $343,103 $262,329 $918,151 $575, % $142,732 $485,835 $262,329 $1,180,480 $694, % $156,725 $642,560 $262,329 $1,442,809 $800, % $179,591 $822,151 $262,329 $1,705,138 $882, % $210,379 $1,032,530 $262,329 $1,967,467 $934, % $241,130 $1,273,661 $262,329 $2,229,796 $956, % $342,074 $1,615,734 $262,329 $2,492,125 $876, % $369,141 $1,984,876 $262,329 $2,754,454 $769, % $401,760 $2,386,636 $262,329 $3,016,783 $630, % $438,375 $2,825,010 $262,329 $3,279,112 $454, % $484,318 $3,309,328 $262,329 $3,541,441 $232, % $537,418 $3,846,747 $262,329 $3,803,770 -$42, % $595,873 $4,442,620 $262,329 $4,066,099 -$376, % $648,127 $5,090,747 $262,329 $4,328,428 -$762, % $690,860 $5,781,607 $262,329 $4,590,757 -$1,190, % $674,558 $6,456,166 $262,329 $4,853,086 -$1,603, % According to the UPIA Duty to Investigate: The traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment. Investment Costs: In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee. Reviewing Compliance: Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee s decision or action and not by hindsight. Page: 8 of 12

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13 About ITM TwentyFirst University ITM TwentyFirst University was created to provide those individuals working with personal trusts and TOLI trusts a source of vital information to utilize in their practice. The course topics will include real life case studies that can be applied to day to day situations. Subject matter is designed to help Advisors provide better guidance and assistance to clients. Our faculty consists of sought after presenters who are experts in their related fields. The courses are offered for free and will carry Continuing Education (CE) credits. See specific courses for CE listings Course List - Registration Opening Soon! 1 Hour CE Credit Pending for CFP & CTFA Developing a Compliant and Efficient Trust (ILIT) Administration Process Jason Hassman, Client Relationship Manager, ITM TwentyFirst Pre-Acceptance Process for Unique & Hard to Value Assets Richard Jacobs, Partner, PDS Services How to Make Sure Your TOLI Policies Are Competitive Michael Brohawn, CFP, CLU, Managing Director, ITM TwentyFirst Buying and Selling Specialty Assets John Rowland, Portfolio Manager, PDS Services DOL Proposed Fiduciary Regulation Alexander P. Ryan, Of Counsel, Groom Law Firm Pitfalls of Operations/Management of Specialty Asset Kip West, Chief Operations Officer and Brenda Trevino, Operations Manager, PDS Services Beyond Ratings: An Alternative Approach to Analyzing Life Insurance Financial Strength David Paul, Principal, ALIRT Insurance Research Self-Directed IRAs: Proceed with Caution & Confidence Jean Meyer, President of First Trust Company of Onaga 10 Questions Every Trustee or Advisor Should Ask Before a Client Purchases or Continues a Life Insurance Policy Barry D. Flagg, CFP, CLU, ChFC, GFS, Veralytic, Inc Oil & Gas Update Dana Church, Sr. Portfolio Manager, PDS Services LU-12/09/2015 Minneapolis, MN Office T: New York, NY Office T: Cedar Falls, IA Office T: ITM TwentyFirst All rights reserved.