TOLI REVIEW Fiduciary Issues Helping Your Client Expanding Your Practice

1. TOLI REVIEWFiduciary IssuesHelping Your ClientExpanding Your Practice www.outsourceins.com

2. Trust Owned Life Insurance A Fiduciary Storm is Brewing for: • Institutional Trustees • The “Brother-in-Law” Trustee • The Advisor www.outsourceins.com

4. Trust Owned Life InsuranceWho is the Trustee? • 80% are Non-Professional • Family • Friends • 20% are Corporate and Professional Trustee’s • Banks • Trust Companies • Attorneys • CPA’s • Financial Advisors www.outsourceins.com

5. Trust Owned Life InsuranceA Big Asset to Ignore In Young Families, life insurance may equal 3 to 10 times net worth In Senior Estates, life insurance may equal 25% to 50% of net worth www.outsourceins.com

6. Trust Owned Life Insurance Will the proceeds of the trust-owned life insurance trust be available when needed? www.outsourceins.com

7. Trust Owned Life InsuranceQuantifying the Risk For Example, if you are Trustee for 100 policies, on average you have: • Total Death Benefit – $127,099,600 • Premium – $1,466,800 • Cash Value – $11,118,300 • 27 Policies will lapse worth $34,316,892 (Based on 2006 Investment Scorecard, Inc. Insurance IQ) www.outsourceins.com

8. Trust Owned Life InsuranceQuantifying the Risk • Lost Guarantee Provisions – $4,448,486 • Death Benefits without any or full extended maturity projection – $103,840,373 • Policies not projected to last past life expectancy – $12,328,661 • Policies with outstanding loan balances – $8,515,673 (Potential Death Benefit Liability) • Policies with suspended premiums– $187,750 in annual suspended premium • Policies rated C, D, F or U – $52,823,940 www.outsourceins.com

9. Trust Owned Life Insurance Is the policy still providing the coverage for the best value (i.e. performance)? www.outsourceins.com

10. Trust Owned Life InsuranceIs Life Insurance a Lifetime Purchase? • Have you refinanced your house? • Have you replaced your old TV? • Have you replaced your computer? • Have you reviewed your life insurance? www.outsourceins.com

11. Trust Owned Life InsuranceOld Generation of Policies Problems: • Poorly Performing Policies • Higher cost of mortality • Policy Design was less flexible • Existing loans or low cash value • Needs have changed Opportunity: • Improve cost / benefit by replacing • Sell policy in secondary market • Refinance the policy • Ownership and restructure www.outsourceins.com

12. Trust Owned Life Insurance Other Policy Issues • Incorrect policy ownership • Term insurance period expiring • No conversion right on term insurance • Unknown loans against policies • Poor financial ratings of carrier • Company sold or merged • Declining interest rates www.outsourceins.com

13. Trust Owned Life InsuranceWho Advises the Client to Review? CPA? Not Likely Trustee? Uninformed Agent? 40% are Orphans Attorney? The Trusted Advisor Do you have a fiduciary liability? www.outsourceins.com

14. ASS U ME ? Trust Owned Life Insurance “I assumed the client spoke to the agent.” “I assumed the premium had been paid.” “I assumed it was regularly reviewed.” “I assumed the insurance company notified the client of declining performance.” “I assumed…” www.outsourceins.com

15. Trust Owned Life InsuranceTOLI is a Hot Topic Midwest Trust Company settles out of court for $10,000,000. The policy lapsed and the insured was insurable. American Banker’s Association has made TOLI a new priority. Trusts and Estates magazine has published articles on TOLI recently. www.outsourceins.com

16. Trust Owned Life InsuranceAs Your Client’s Trusted Advisor… • What is your legal obligation? • What is your ethical obligation? • How can you improve your practice and your income? www.outsourceins.com

17. Trust Owned Life InsuranceAdding Value to Client Relationship • Help to identify potential problems that don’t involve document drafting. 2. Help to save money or create profit opportunities outside of “tax savings”. 3. Create good will by showing you care, that you go the extra mile. THIS CREATES GREATER CLIENT TRUST AND REFERRALS www.outsourceins.com

18. Trust Owned Life Insurance A recent study found that 75% of trust-owned life insurance policies could support at least a 40% increase in death benefit at no additional cost, or maintain the same death benefit at a 40% cost reduction: A study of a large portfolio of TOLI [Trust Owned Life Insurance] policies held by a cross-section of bank trustees indicated a 75% chance that the death proceeds payable to a trust, for the benefit of its beneficiaries, could be increased by 40% or more with no increase in planned funding. Or, alternatively, funding could be reduced 40% or more with no decrease in death benefits payable to the trust. American Banker - February 3, 1998; Page 17; Volume 163; Number 22 www.outsourceins.com

19. Trust Owned Life Insurance 75% OF Your Clients Can Benefit from a TOLI Review Free insurance Lower premium Profit from sale www.outsourceins.com

20. Trust Owned Life InsuranceCase StudyNew Policy Pricing Models Existing Policy: Paid up – No premium $332,000 death benefit guaranteed Cash value $181,000. Replacement Policy: 1035 existing cash value No more premiums $824,000 death benefit guaranteed ~ NO COST TO CLIENT ~ www.outsourceins.com

21. Trust Owned Life InsuranceCase Study • Existing $15 million of coverage • Carriers: AA and AAA American General Hartford Connecticut General • Age of policies: 5 – 8 Years old (Purchased in her 70s) Female Age 81 You would assume no problem, right? www.outsourceins.com

22. Trust Owned Life InsuranceCase Study Policy Review showed: • If premiums continued without increases, then all policies will terminate in 3-8 years (Age 84-91). • To keep existing coverage in force to age 95 required 82% premium increase, i.e. $542,000 to $897,624 www.outsourceins.com

23. Trust Owned Life InsuranceCase Study Real Cost Effective premium increase of $533,436 annually www.outsourceins.com

24. Trust Owned Life InsuranceCase Study Solution: Save $428,000 premium annually and guarantee coverage to age 120 www.outsourceins.com

25. Trust Owned Life InsuranceCase Study

26. Trust Owned Life InsuranceCase Study How is this possible? Death Benefit Existing Policy Cash Value Life Settlement Market $2,000,000 Connecticut $24,249 $4,000,000 Connecticut $99,719 $3,000,000 Hartford $112,500 $3,000,000 American General $94,183 $3,000,000 American General $94,183 $536,844 → → → $2,500,00 Increase in Cash Value of $1,963,156

27. Trust Owned Life InsuranceCase Study Tax Treatment of the “Newfound” $1,963,156 No Taxes Due In this case, total premiums exceeded the total purchase price ($2.5M), so there was no gain. (Premiums Paid = Basis) www.outsourceins.com

28. Trust Owned Life InsuranceCase Study Underwriting Applied to 27 major companies - Only ONE gave a Standard Offer 12 Declined 7 Offered Table 4+ 5 Offered Table 3 2 Offered Table 2 www.outsourceins.com

29. Trust Owned Life InsuranceCase Study This Works For: • Policies held in trusts for Estate Planning • Old Split-Dollar Plans • Buy-Sell Policies • Target Market: 70+ www.outsourceins.com

30. Trust Owned Life InsuranceFiduciary Duty “… it is the duty of the trustee of a trust containing as one of its assets a life insurance policy, to examine regularly the question the Uniform Act’s philosophy: whether that policy should be sold under a life settlement, and the proceeds thereof invested in assets providing a more immediate return…” - Dean Edward Miller, Banking Law Journal May ‘02 “There is clear evidence that suggests that life insurance professionals have a duty to inform policy owners of the availability of the life settlement option even if it is contrary to the insurer’s interest. Trustees and other fiduciaries must closely monitor the performance of life insurance policies held in trust to insure that they are meeting the objectives of the trust. Failure of a member of either profession to do so may subject him to legal action for failure to exercise the required level of due care.” - Robert P. Copeland, J.D., M.B.A., Elder Law and Estate Planning, Attorney and Author www.outsourceins.com

31. Trust Owned Life InsuranceLifetime Settlement Option Individual, Corporate, and Trustee policyholders can raise money by treating their insurance coverage as an asset. www.outsourceins.com

32. Trust Owned Life InsuranceInsurance Product Development Life InsuranceAnnuity Term Whole Life Deferred Annuity SPIA (Single Premium Immediate Annuity) • Annuity Renewable • Level Term (10/15/20/30 yr) • Return of premium Term • Universal Life (fixed) • Variable Universal Life • UL with Guaranteed No Lapse • Variable with Guarantees • 100% First Year Cash Value • Cashectomy Policy • Sliding Scale Premium • Guarantees with Catch Up Provisions • Return of premium Universal Life • Fixed Return • Variable Return • Short Term • Longer term • Flexible Withdrawal Options • Variable with “Guaranteed Flow” • Variable with “Ratchet” • Annuities / Long Term Care • Hybrids • Single Life • Joint Life • Lifetime with Life Certain • Fixed Return • Variable Return • Rated Annuities • SPIA with Death Benefit • SPIA with Immediate Returns www.outsourceins.com

33. Life Settlement

34. Life SettlementWhat is the Value of a Life Insurance Policy? • Cash value? • Surrender value? • Rev. Proc. 2005-25 value? • Settlement value? • Intepolated terminal reserve value? www.outsourceins.com

35. Life SettlementHistory • Viatical Business of (early 90’s) AIDS Cases / Terminally Ill • Corporate Owned Life Insurance (late 90’s) Iacocca Example • Emergence of Capital Markets Coventry Berkshire Hathaway European Capital www.outsourceins.com

36. Life SettlementFuture $160,000,000,000 (Billion) Market Anticipates obsolete Life Policies Increase in Exclusions Unaffordable Policies Declining Cost of Replacement Insurance Arbitrage of Selling Old / Buying New www.outsourceins.com

37. Life SettlementWhy Settle a Policy? Policy No Longer Needed: Beneficiary dies, “keyman” policy obsolete, children are grown and independent Policy is No Longer Efficient: Replacement may be more cost efficient Change in Tax Liability: Increased exclusions, reduced estate tax, or estate tax repeal Policy Objectives Change: Client may be more concerned about long term care and could sell policy and purchase LTC or annuity www.outsourceins.com

38. Life SettlementFactors That Contribute to Settlement Value • Policy Face Value • Insured’s Life Expectancy • Outstanding Loans • Policy Cash Value • Ongoing Premiums to Keep Policies In-Force • Competition Among Settlement Companies • Good Ol’ Fashioned Bargaining www.outsourceins.com

39. Life SettlementHow much might a policy be worth? Below 70 - Virtually No Market (Unless Serious Health Issues) Age 75 - 15% of Face Value Age 80 - 20% of Face Value Age 85 - 25% of Face Value The shorter the life expectancy, the higher the price www.outsourceins.com

40. Life SettlementTaxation Sale price = $200,000 (20% of Face) $1,000,000 – Face $50,000 – Basis $60,000 – Cash Value $50,000 Basis - no tax – return of premium $10,000 Ordinary income – cash value gain $140,000 Long term capital – sale price in excess of cash value www.outsourceins.com

41. Life Settlement Everyone over 75 should have policies appraised, reviewed and outline options for: - Selling - Refinancing - Replacing www.outsourceins.com

42. Improve Your Practice

43. Improve Your Practice • Go through your files and identify all clients 70+ with life insurance. • Send letter recommending a review of the estate plan in light of: a) changes in exemptions. b) need for updating facts and circumstances. • When appointment is set, request that they bring their most recent existing life insurance billing statement and annual policy update because you want to confirm the coordination of the policy and the estate plan. 4. When they meet, do your normal review - Most are wanting to update the “squander clauses” anyway. www.outsourceins.com

44. Improve Your Practice 5. Ask for insurance “billing” and policy report, because it is a key element of the plan. 6. Ask: a) “When did you last have your policy reviewed?” b) “Do you know how this policy is performing?” c) “Old insurance products are like old computers – obsolete and low performance.” d) Suggest they review the policy. e) Ask them to sign a release of liability that you prepared for them related to any representations of their insurance. www.outsourceins.com

45. Improve Your Practice • Explain that they can have an agent review it or a “policy audit” by an outside service for $150 per policy if they don’t want to meet with an agent. • Give them a copy of: Why You Need to Review Your Life Insurance PolicyAvailable at: www.outsourceins.com 9. Ask them to send you a copy of the results of the review for your records. www.outsourceins.com

46. SUMMARY • Don’t assume what your clients tell you about their insurance is factual. • Eliminate potential fiduciary liability by getting a release. • Help your client by recommending a “policy audit”. • Integrate this into your practice. • Use this to revisit your largest clients and get referrals. www.outsourceins.com

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