Anyone who doubts the need for frequent reviews, and the transient nature of the insurance business, need only take a look back at how industry trends have evolved. In the 1980s, insurance agents often recommended replacing whole life policies with universal life policies. Using illustrations that typically projected a fixed annual rate of return between 10% and 12% over 20 or more years, agents would often tell policyholders that universal life policy premiums would "vanish" at some point. But when carrier bond portfolios subsequently underperformed, the carriers had no choice but to decrease their interest crediting rates on these universal life policies and premiums were extended or reappeared.
The insurance industry then turned to the equity markets for double-digit annual returns, introducing variable universal life products in the 1990s and shifting all investment responsibility to the policyholder.
Diversification
Would a prudent investor construct an investment portfolio consisting of only Microsoft or Google? Asset allocation and risk management are what investors expect today of their investment portfolio managers.
For wealthy families, the same need for diversification and risk management applies to their life insurance portfolio. Events of the past few years have clearly shown why diversification is so important. In 2007, for example, AIG had a 98 Comdex rating, among the highest in the industry. Today, the Comdex rating for AIG is 83, whereas the ratings of almost all its peers remain in the high 90s.
We recommend diversification not only among insurance companies but also among product types. Constructing a diversified portfolio of different TOLI products permits a blending of guarantees, interest rates and product return risks that produces a set of features not possible with only one product type.
Trustees should also be aware of the following variables when it comes to assessing insurance products held in trust:
Declining Mortality Charges
The life expectancy of an insured at policy issuance is a major factor that determines premiums. Beginning in 2009, all U.S. carriers were required to use mortality tables based on the 2000 U.S. Census. The longer life expectancy in the U.S. should result in lower "costs of insurance" translating into reduced premiums, but only for policies issued after 2008. Carriers have also drastically reduced their profit margins, which has helped consumers reduce their insurance costs.
Underwriting Anomalies
Underwriting at the top carriers is situational. Both positive and negative underwriting anomalies occur daily. A favorable underwriting outcome may be offered to a life insurance applicant by a particular carrier simply because, for a limited period of time, it wishes to fill its mortality grid with people of the same age group. Check back a few months later when that carrier's age bracket for that product type is full and that offer may no longer be on the table.
Secondary Market Offers
Life insurance contracts on older, less healthy policyholders should have their secondary market value regularly checked. The secondary market has become increasingly transparent as states adopt regulatory oversight. Life settlement companies may be willing to pay as much as 30% or more of the death benefit amount to buy the policy, which is often well in excess of the cash surrender value of the issuing carrier.
Buy And Monitor
A "buy and hold" strategy is inappropriate for a life insurance portfolio. With medical advances and greater longevity, new policy pricing is improving rapidly. Carrier profit margins, however, are being squeezed because of historically low bond portfolio yields, pressure on carriers by state regulators to strengthen balance sheets and the aftermath of previous aggressive pricing and reserving on NLG UL policies. For a wealthy insured who has not had a material health change, any policy over five years old could likely be made more efficient and any policy over ten years old almost certainly can be made more efficient.
What follows are the components of an ILIT checkup suitable for trustees responsible for managing TOLI: