The Life Insurance Policy Crisis: The Advisors and Trustees Guide to Managing Risks and Avoiding a Client Crisis

The Life Insurance Policy Crisis: The Advisors and Trustees Guide to Managing Risks and Avoiding a Client Crisis

by E. Randolph Whitelaw, Henry Montag

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For many years, life insurance was considered one of the most ethical and stable financial services businesses. But, following the introduction of flexible premium non-guaranteed death benefit products in the early 1980s, this reputation gradually changed. Today there is a life insurance policy crisis for reasons predicted 35 years ago, and it requires attention in order to avoid policy lapse without value along with allegations of deceptive and misleading practices.

How could this happen? Policy crediting rates have continually declined from the 15% non-guaranteed range to the guaranteed minimum, typically 4%. Sales agents had the software to prepare illustrations at crediting rates known not be sustainable over a 25 to 50-year time period, giving rise to the 'win the illustration contest' sales era. As the crediting rate drop to the guaranteed minimum, cost of insurance charges increased, which accelerates the probability of policy lapse especially with policies insuring seniors if corrective action is not taken. However, issuing life insurance carriers and most ‘sales’ agents do not offer post-sales policy risk management services, much less such services that meet a ‘dispute defensible’ standard. The warning signs commenced over 25 years ago but inattention has persisted. Today, many policy holders are faced with a major dilemma: either pay a significantly higher annual , or significantly reduce the death benefit, or surrender/sell the policy and lose the planning benefits they’ve paid into for decades, or do nothing an await lapse without value. This crisis has been covered by The New York Times and the Wall Street Journal, but unfortunately shows no signs of abating.

The Life Insurance Policy Crisis pulls back the veil on this looming crisis, and explains the solutions for fixing it. Authors E. Randolph Whitelaw and Henry Montag bring their 75 years of combined experience in financial planning and insurance counseling to review the readily-available post-sales policy administration and creditable risk management options that life insurance companies, sales agents and policy owners have ignored for decades. They explain the intervention process trusted advisors can recommend to policy owners to avoid unexpected lapse, obtain creditable fact-based risk management, and ensure a favorable planning outcome.

Topics include:

A history of the lapsing life insurance policy crisis and the questionable deceptive and misleading practices that led to it

A fresh look at the sustainability of existing policies

Restoring customer confidence in the life insurance policy distribution system

Reforms that can help all policies remain solvent

Best practices in litigating against the predatory practices of the life insurance industry

Sample documents and reference articles to resolve many of the identified problems

Product Details

ISBN-13: 9781634256186
Publisher: American Bar Association
Publication date: 06/01/2017
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 244
File size: 3 MB

About the Author

E. Randolph Whitelaw is Managing Director of Trust Asset Consultants, LLC (TAC), a Trust-Owned Life Insurance (TOLI) risk management consulting firm, and The TOLI Center, LLC (TTC), a life insurance policy administration and risk management firm. TAC's clients are trustees, beneficiaries, professional advisors and affluent family groups. TTC provides professional fiduciaries, professional advisors, affluent families and businesses with a service-based life insurance plan administration and policy risk management platform.E. Randolph Whitelaw

A leader in the TOLI risk management consulting and restructure marketplace, he is frequently engaged by professional fiduciaries and estate planning professionals to provide expert opinion and testimony in dispute and litigation matters. He lectures nationwide and regularly authors in-depth peer-reviewed articles that illustrate his comprehensive knowledge of the ever-changing life insurance and life settlement markets.

Mr. Whitelaw has a corporate finance background. He spent 15 years with a major bank holding company working with its public corporation and larger private business clients. His lending experience includes coordination of multi-lender 'work-out' borrowing arrangements and interface with OCC bank examiners. As Executive Vice President, he managed the holding company’s middle market business and private client group including the cross marketing of trust, investment, and life insurance services.

In the mid-1980s, he co-founded a consulting firm to specialize in the unique management and business continuity planning issues of larger family businesses, affluent family groups and family offices. His company offered investment advisory, life insurance and family office support services as well as the design, implementation and management of non-qualified deferred compensation plans for public corporations. In 1993, he co-founded and served as managing partner of a feebased third-party TOLI policy administration company that developed a national reputation and clientele among regulated trustees and estate planning professionals.

In 2001, he founded Trust Asset Consultants, LLC to provide corporate trustees, professional advisors, and insurance trust beneficiaries with "single source" TOLI fiduciary risk management consulting services. In 2004, he and Liz Colosimo co-founded Life Settlement Partners, LLC, a life settlement consulting firm that works exclusively with policy sellers.

Henry Montag is an Independent Certified Financial Planner in practice since 1976 with offices in Long Island and New York. He is a principle of The TOLI Center East, which provides independent fee-based performance evaluation for private trustees, their advisers and institutional trustees regarding the protection of private or trust-owned life Insurance.

He has had articles published in various publications including those of the New York State Bar Association, NYSSCPA's Tax Stringer, Tax Facts, National Conference of CPA Practitioners, and Suffolk County Women’s Bar Association. He has lectured extensively on the proper utilization of financial products to protect and preserve assets to the New York State Bar Association, the New York State Society of CPAs, The American Institute of CPAs and the National Conference of CPA Practitioners.

He has been a source for The Wall Street Journal, Investor's Business daily, Investment News, Newsday, Long Island Business News and featured in Financial Planning Magazine.

He has also appeared on Fox News, News 12, Wall Street Week TV, and FIOS Money & Main Street. He has recently co-authored a book for the American Bar Association, (A.B.A), titled: "The Advisor’s Guide to Managing Risk and Avoiding a Client Crisis" (Release Sept 2016).

Table of Contents

Introduction xiii

Chapter 1 History of the Lapsing Life Insurance Policy and Irrevocable Life Insurance Trust Insolvency Crisis 1

How Could This Happen? 1

The Buy-and-Hold Era 2

The Onset of Creative Destruction 3

Interest Rate Catalyst for Change 4

Buy and Hold vs. Buy and Manage 7

Irrevocable Life Insurance Trust Solvency 8

The Need to Align the Interests of the Consumer, Agent, Carrier, and Fiduciary 9

Chapter 2 Life Insurance Products and Product Suitability: A Fresh Look Is Needed 11

Product Explosion: Good, Bad, and Ugly News Implications 11

The Resultant Suitability Hurdle 12

Life Insurance Product Planning and Risks Primer 13

Product Types and Suitability Considerations 15

Defined Benefit: Replacement Priced Policies 16

Defined Contribution: Retention Priced Policies 19

Duration Planning 20

Rider Considerations 20

Annual Policy Risk Management 21

Policy Restructure 24

The Fresh Look: Theory and Practice 24

The Fresh Look: Request for Proposal Purchase and Management Issues to Consider 25

Conclusion 26

Chapter 3 The Outdated Traditional Retail Agent Distribution Channel: Life Insurance Is Sold, Not Purchased 27

Case Study 27

The Need for Change 28

Perception Is Everything … or Is It? 28

Misleading Illustration Marketing 29

Product Evolution Good and Bad News 31

The Loss of Trust and Confidence 31

The Sales Agent Dilemma 32

Carrier Communication Challenges 33

Orphan Policies 33

Conclusion 34

Chapter 4 Current Day Response to Questionable Ethical Practices and This Lapsing Policy Crisis: Some Things Never Change, Except Possibly to Get Worse 35

A Tipping Point? 35

After Decades of Discussion, Best Practices Remains a Goal 36

Terms to Consider 36

Current Thinking 37

Product du Jour Marketing 37

Policy Replacement Schemes 37

Aggressive Replacement Marketing 38

Conclusion 41

Chapter 5 Consumer-Centric Life Insurance Distribution: How to Restore Consumer Confidence and Value-Added Distribution 43

Frozen-in-Time Thinking 44

Key Consumer Caveat Emptor Considerations (A.K.A. Lessons Learned) 45

Multi-Tier Distribution 46

The "Take Control" Hurdles to Overcome 47

Take Control of the Purchase Process. What Does That Mean? 47

Take Control of the Management Process. How Can That Be Accomplished? 48

Delegation 48

Suitability and Fiduciary Practices 49

Conclusion 49

Advisor and Trustee Guidance 50

Chapter 6 The Life Insurance Policy Risk Management Process: Best vs. Questionable vs. Predatory vs. No Practices 51

Can Life insurance Be Credibly Managed? 51

The Policy Illustration Problem 53

Actuarially Defensible Policy Evaluation 55

Sample Inforce Policy Evaluation 56

Credible Policy Risk Management Considerations 58

Sample Cases 59

Take-Away Observations 61

The Life Insurance Risk Management Process 61

Duration (Longevity) Analysis and Planning 63

Conclusion 65

Chapter 7 Inforce Life Insurance Policy Intervention: Damage Control: A Glidepath to Safety Intervention- Action Taken to Improve a Situation 67

Executive Summary 67

Is intervention Just Same-Old, Same-Old Life Insurance Marketing Hype? 68

Getting Started: Key Questions for Intervention Consideration 69

The Intervention Process (Plan Your Work and Work Your Plan) 70

Getting Started: Delegation of the Life Insurance Product and Policy Evaluation Expertise Functions 71

Intervention Forms 71

Intervention: Senior Insured Persons 72

Intervention: The Time-Tested Risk Management Process 73

Intervention Statistical Support: Consider the Following Statistics 74

Intervention-Legal and Tax Advisor Role 75

Conclusion 75

Intervention: "Action Taken to Improve a Situation" 75

Chapter 8 Long Term Care Insurance 1980-2015 77

History of Long-Term Care Insurance 77

What Is Long Term Care Insurance? 78

The Market 78

The Elder Law Strategy 78

The Government's Strategy 79

The Partnership Strategy 79

Pricing Assumptions 80

Combination/Linked Products 80

Combination Linked Strategies 81

Current Trends 82

Conclusion 82

Author's Note 83

Chapter 9 Life Insurance as an Asset Class: The Gap between Theory and Practice 85

Definitions 86

The Planning Value of Life Insurance 87

The Gap between Theory and Practice 88

Conclusion 89

Chapter 10 Life Settlement Market 91

Settlement Market History 93

Settlement Market Considerations 93

Viatical and Life Settlement 93

Life Settlement Tax Implications 94

Settlement Mechanics 94

Payment Options 95

Situations Appropriate for Settlement 96

Broker Selection 96

Settlement Licensing 96

Settlement Compensation 96

Sample Cases 97

Sample Life Settlement of a Trust-Owned Life Insurance Policy 97

Sample Viatical Settlement Case with Rescission 97

Sample Life Settlement with Bankruptcy 98

Life Insurance Producer Duty to Disclose the Settlement Option 98

Larry Grill et al v. Lincoln National Life Insurance Company Speaks to This Disclosure Issue 99

Conclusion 99

Life Settlement Broker Disclosure Samples 100

Settlement Disclosure Statement 100

Important Information You Should Know before Entering into a Viatical or Life Settlement 102

Chapter 11 How Can Irrevocable Life insurance Trust (ILIT) Fiduciary Practices Demonstrate and Document a Prudent and Reasoned Process? 105

Delegate-Diversify-Disclose 105

Reader Perspective 108

The ILIT Fiduciary Practices Fresh Look Starting Point: Advisor Involvement and Delegation 111

How Could This Happen? 112

How Can Inattention Be Overcome? 112

Who Are the ILIT Parties That Are Advisors and How Can They Participate in This Corrective Action Assessment? 112

Which Advisor Is Likely to Be the Most Effective "Quarterback" in Establishing Procedures to Avoid Policy Lapse and Trust Insolvency? 113

Key ILIT Administration and Asset Management Parties: A More In-depth Discussion 114

The Drafting Attorney 115

The ILIT Trustee 116

Life Insurance Sales Agent-Is a Life Insurance Sales Agent Held to a Fiduciary or Suitability Standard? 119

Attorney-Trustee-Sales Agent Alignment-Doing the Right Thing in the Right Way Requires Process, Delegation, Diversification, and Disclosure 120

The TOLI Risk Management Hurdles 121

ILIT and TOLI Myths to Dispel 122

The Intervention Process: Plan Your Work and Work Your Plan 123

Beneficiary Protection Checklist Considerations 126

Litigation 129

Conclusion 131

Serious Problems Cannot Be Dealt With at the Level of Thinking That Created Them 132

Chapter 12 Fiduciary Issues vs. Life Insurance Practices: Can the Dots Be Connected? 133

Life insurance Prudent Practices-Problem-Solving Questions to Consider 134

Connecting the Dots: Definitions to Consider 135

Lessons Learned Guidance to Connect the Dots 137

Conclusion: "Discipline Is the Bridge between Goals and Accomplishments" 138

Chapter 13 ILIT Litigation: Process over Performance (Best Practices Litigation-Tested Guidance) 141

The Right versus Wrong Way Model: ILIT Best versus Predatory Practices 142

The Missing "Buy Side" Discipline 143

Delegation Considerations to Avoid Defective Practices: A Quiz 144

The Important Role of Litigation 145

Litigation 145

Cochran v. KeyBank 145

Subsequent Defining Matters 148

Practices Affirmed 149

Issues Warranting Further Attention 149

Conclusion 149

Chapter 14 Special Issues 151

Fiduciary Advisor Series (FAS) 151

Family Offices 151

Sample Older Age and Impaired Risk Request for Proposal 151

Trust Protectors 152

Financed Life Insurance 153

Red Flags 153

Chapter 15 Sample Documents 155

Life Insurance Planning Worksheet 156

Planning Purpose Brief Description 156

Beneficiaries 156

Sample Portfolio Management Consulting Services Letter 157

Sample New Policy Request for Proposal 159

(Death Benefit Driven Purpose) 159

(Investment Driven Purpose) 160

Request for Proposal: Life Insurance Policy Administration and Risk Management Provider 162

Sample Sales Agent Suitability Letter 163

Life Insurance Planning and Management 164

Life Insurance Policy Statement 164

Exhibit 1-Product Suitability Matrix 169

Sample Grantor Guidance Letter 172

Irrevocable Life Insurance Trust 173

Trust-Owned Life Insurance Investment Policy Statement 173

Exhibit 1-Product Suitability Matrix 179

Sample Older Age & Impaired Risk Request for Proposal 179

Chapter 16 Reference Articles 181

Articles-Life Insurance Planning and Risk Management 181

Articles-Changing Life Insurance Distribution Model 182

Articles-Trust-Owned Life Insurance 183

Articles-Trust-Owned Life Insurance E. Randolph Whitelaw 183

Articles-Trust-Owned Life Insurance E. Randolph Whitelaw Henry Montag) 184

Articles-Trust-Owned Life Insurance Henry Montag 185

Articles-Long-Term Care Insurance Henry Montag 185

TOLI Media News Stories Henry Montag 186

Books, Handbooks, and Reports 187

Educational Sources 187

Chapter 17 Sample Life Insurance Cases 189

Chapter 18 Contributed Articles 197

Trustee Appointment 197

It's Time to Dust Off Those Insurance Policies 199

Alan Gassman's "Skeptical Glasses" Talking Points 201

Actuarial Evaluation of Life Insurance Products 203

Order Does Make a Difference 204

Getting Back on Track 205

Leveraging of COI Charges 207

On Mortality Rates 207

The Elements of Risk in a Life Insurance Product 208

Carrier Risk 208

Inflation Risk 208

The Risk of Life Insurance Contract Survivorship 208

Return Risk 208

The Society of Actuaries Report on Illustrations 209

Understanding the Contract 210

Buy and Hold is Not an Acceptable Strategy 210

Finding a Funding Level 210

The Last Question 212

Long-Term Care Insurance Riders and Tax Consequences 212

Estate Tax Consequences 212

Income Tax Consequences 213

Paying for the Long Term Care 213

In Summary 214

Trust Owned Life Insurance (TOLI) Policy Replacements Also Known Euphemistically as Policy Exchanges, Restructurings and Upgrades 215

Basic Replacement Premise for the New Replacement Policy to Make Economic Sense 216

Key Questions to Consider in a TOLI Replacement 216

Illustrations Are a Necessary Part, but Not the Entire Replacement Transaction 216

Other Factors to Be Considered 216

Suggested Replacement Process 217

Inherent Policy Risk Factors 217

Risks under Various Types of Life insurance Policies 218

Summary 218

What This Treatise Does Not Discuss 219

Individual (Accommodation) Trustees: The Trust Ticking Time Bomb 219

Introduction 219

The Good of Individual Trustees 219

The Bad of individual Trustees 220

The Ugly of Individual Trustees 221

Conclusion 222

Conclusion 223

Glossary of Terms 227

Index 245

Customer Reviews