Beyond the valuable benefits life insurance can provide at death, life insurance can also be used as a way to accumulate wealth, defer or eliminate taxes, and provide retirement income. Life insurance offers the following additional “living” benefits:

• Provides tax deferral on any gains within the cash value of the policy, resulting in save savings as reflected in the Cash Value Internal Rate of Return (IRR).
• Allows access to policy values through loans and withdrawals that are generally not subject to income tax, if properly structured.
• Is not subject to limitations on annual contribution amounts, early withdrawal penalties, or required distributions, as is common with many types of retirement savings vehicles, such as 401(k)s.
• Creates an opportunity to keep other assets allocated in less liquid investments, allowing the policyowner to maintain a diversified portfolio of several asset classes.
• Comes in a variety of different forms, offering cash value allocation options to match a policy owner’s risk/reward tolerance and help meet investment objectives.
• Allows partial or total cost recovery on certain plans if coverage is discontinued through the cash surrender value feature.

All life insurance policies fall into one of two general categories:

• Term life insurance:
• Temporary – provides protection for a set period of time
• If coverage is needed after the initial term period, full medical and financial underwriting is generally required
• Many policies offer a “conversion privilege” for a limited number of years, allowing the policy to be exchanged for a permanent policy without underwriting

• Cash value life insurance:
• Can provide permanent protection
• Reserves future cost of insurance charges based upon your current health status
• Includes an internal savings component

Variations of Cash Value policy types include:

• Whole Life (WL):

A whole life insurance policy’s face amount will be paid at the death of the insured, no matter when the death occurs, as long as the policy is in force.

The policyowner must pay the scheduled premiums on time and meet the requirements of the policy to keep the policy in force.

• Universal Life (UL):

UL policies offer more flexibility and transparency relative to whole life policies.

The policyowner has the ability to modify the amount and duration of premium payments, within certain limits, and still maintain coverage for life as long as the cash value reserve is positive.

• Indexed Universal Life (IUL):

UL platform variation, but with an interest crediting rate determined by reference to an equity index, typically subject to a maximum rate cap and a minimum rate floor.

• Variable Universal Life (VUL):

UL platform variation, but with policyowner investment flexibility and risk/return opportunity.

VUL products permit the policyowner to allocate a portion of each premium payment into one or more “separate account” funds.

Separate accounts, which are similar to mutual funds, are not subject to the restrictions of the carrier’s general account portfolio, reducing the policyowner’s exposure in the event of carrier insolvency.

• No-Lapse Guarantee (NLG):

UL platform variation, with a guarantee that if a specified minimum premium is paid regularly, the policy will not lapse for a specified period, or for life, even if the cash value decreases to zero.

NLG policies typically offer reduced cash value in comparison to other policy type

Risk Tolerance

No-Lapse Universal Life

– Conservative  –

-“Intolerant of volatility and seeks guarantees”

Participating Whole Life

– Moderate /Conservative –

-“Intolerant of volatility and seeks guarantees. Willing to pay higher premium for upside potential.”

Traditional Universal Life

– Balanced –

-“Tolerant of modest volatility and willing to accept fewer guarantees in favor of premium flexibility.”

Indexed Universal Life

– Moderate /Aggressive –

-“Tolerant of higher volatility and willing to accept fewer guarantees in favor of premium flexibility and cash value accumulation potential.”

Variable Universal Life

• Aggressive –
• “Tolerant of volatility and willing to do without any guarantees in favor of premium investment opportunity.”

Fiduciary responsibility / liability

Trust or Corporate Owned

Change in products and pricing  

More competitive products now available  

Pricing improvements by companies  

Clients’ improved health  

Table Shaving Programs

Identify underperforming policies before it’s too late

Reassess initial planning objectives

Overfunded or “cash rich” policies

Carriers/agent’s assumptions too aggressive

Review carrier financial strength.  

Illustrations and product performance are not guaranteed.  

Crediting rates likely to continue to decrease.  

Fund insurance policy appropriately (i.e., cushioning).  

In-force policy reviews are critical.  

Even guarantees have strings attached.  

Consider in-force management track record and philosophy when considering product selection

Life insurance illustrations and performance are not guaranteed.

Product performance will change over time.
Trustee actions may be required to maintain the insurance goal.
Different product types have different risks and guarantees which impact product performance
Life insurance pricing fundamentals:
─ Mortality Experience
─ Investment Yield
─ Expense Experience
─ Persistency Experience
Illustrations based on current experience.
Insurers change product charges and loads (subject to guarantees) as emerging experience changes
Economic conditions, such as low interest rates and equity market volatility, generally impact all financial instruments, including life insurance.
In general, life insurance has performed well relative to other financial instruments.
─ Superior portfolio yields and crediting rates (4%–5%).
─ High-quality assets with comparatively low defaults rates.
─ Tax-deferred inside build up of cash values.

Life insurance must be valued for various reasons:

─ When a policy is being given to a trust, heirs, or a charity.

─ When a policy is being sold by one party to another.

─ When a policy is being distributed by an employer or from a qualified retirement plan.

Valuing the asset may prove challenging due to:

─ Different methodologies used by life insurance companies.

─ Various methods prescribed through IRS guidance.

─ Unique circumstances.

Do Nothing
─ The insured’s health has deteriorated and the expectation of his or her living past the projected date of policy lapse is remote.
─ The review is taking place early in the life of the policy, and sufficient time remains for policy values to get back on track.
─ The policyholder is unable to pay additional premiums.
Make Additional Payments
─ Cost of additional premiums is leveraged with premium delays.
Reduce the Death Benefit
─ Consider term insurance to make up reduced permanent coverage.
Replace the Policy
─ New policies with improved pricing may provide superior performance but must get past new issue loads.
─ Typically early cash values are reduced due to new issue loads

─ A trustee is a “fiduciary.”

─ Held to a high standard of care.

─ State law may create unexpected responsibilities

3 Categories of Trustees

Professional trustees and trust companies.

Professional advisors (attorneys, CPAs, accountants).  

Family relatives or friends (spouses, children, relatives, friends).

Trustees for Irrevocable Life Insurance Trust (ILIT)

As a practical matter, trustees do this only as a courtesy or an accommodation to clients, friends, or family.

─ Very low fees relative to the potential liability.

─ Complicated and unique asset.

─ Rarely does the trustee have the expertise or internal resources to supervise and manage life insurance

Supervision and management of the trust assets (i.e. the life insurance policy and any other assets held within the ILIT)

Though ILITs are commonplace, they are still trusts with fiduciary duties that must be satisfied.

Standards of Care have changed.    

The Prudent Investor Rule has been widely adopted.  

New rules may even apply to trusts created before the new standards were adopted.  Trustees are, or should be, concerned

Generally, a trust may establish its own standards of care and fiduciary responsibilities through the terms included within it.  If the trust doesn’t set such standards, then state law does.

─ The old “Prudent Man” Standard—goal was to preserve the principal.

─ The new “Prudent Investor” Standard—goal is to grow the principal.

Prudent Investor” Standard

Since 1994, most states have changed to this standard.  

No exemption for trusts established before the “Prudent Investor” standard was adopted.  Adopted in 44 states and the District of Columbia.

─ Delaware adopted a version of the prudent investor approach in 1986 before the uniform act was finalized

Applies modern investment principles to trust management:

─ Trustees must use reasonable strategies to grow trust assets.

─ Trust assets should be managed together as a single portfolio.

─ Absent special circumstances, trust assets should be diversified.

─ Trustees can hire experts to help in making decisions

The trustee should implement good procedures:

─ Adopt a formal investment strategy to grow the trust.

─ Diversify the trust’s assets.

─ Regularly monitor asset performance.

─ Make changes as necessary.

Administering an ILIT can be difficult:

─ Life insurance policies are complex financial instruments.

─ The policy may not perform as originally expected.

─ Funds to pay the premiums may not come into the trust.

─ Cash value withdrawals or loans* may limit the policy’s performance.

Life Insurance Experts can help the “ILIT” Trustee:

Review the trust’s life insurance policies.  

Evaluate the current policies to see how they have performed.  

Survey the marketplace to see if better life insurance policies are available.  

Summarize available options and make recommendations

Life insurance illustrations and performance are not guaranteed.

Product performance will change over time.

Trustee actions may be required to maintain the insurance goal.

Different product types have different risks and guarantees which impact product performance

Life insurance pricing fundamentals:

─ Mortality Experience

─ Investment Yield

─ Expense Experience

─ Persistency Experience

Illustrations based on current experience.

Insurers change product charges and loads (subject to guarantees) as emerging experience changes

Economic conditions, such as low interest rates and equity market volatility, generally impact all financial instruments, including life insurance.

In general, life insurance has performed well relative to other financial instruments.

─ Superior portfolio yields and crediting rates (4%–5%).

─ High-quality assets with comparatively low defaults rates.

─ Tax-deferred inside build up of cash values.

Insurers invest in high-quality bonds and mortgages.

─ Recent trend: greater allocation to Baa to increase yield.  

New money fixed income rates have generally declined.

─ However, new money rates have increased approximately 80 bps in the last year.  

Portfolio yields lag new money rates and continue to drop.  

Continued downward pressure on UL crediting rates which are tied to portfolio yields.  Portfolio crediting rates will continue to drop even if new money rates gradually increase due to lag factor

Do Nothing

─ The insured’s health has deteriorated and the expectation of his or her living past the projected date of policy lapse is remote.

─ The review is taking place early in the life of the policy, and sufficient time remains for policy values to get back on track.

─ The policyholder is unable to pay additional premiums.  

Make Additional Payments

─ Cost of additional premiums is leveraged with premium delays.

Reduce the Death Benefit

─ Consider term insurance to make up reduced permanent coverage.  

Replace the Policy

─ New policies with improved pricing may provide superior performance but must get past new issue loads.

─ Typically early cash values are reduced due to new issue loads

In general, policy pricing/performance continues to improve primarily due to continued mortality improvement.

Most in-force policies have not been updated with improvements such as lower mortality charges.
In addition, if insured has maintained or improved health, new underwriting may lead to more favorable pricing
Policies no longer mature and therefore endowment funding may not be needed.
New “Protection” products provide lower premium outlays.
Therefore, periodic assessment of in-force policy versus new policies is recommended regardless of current performance.