Case Studies

A corporate trustee that was presented an insurance trust totaling $75mm , comprised of twenty four policies (a combination of  Whole Life, Universal Life , and many Variable Universal Life policies), called us.

The trustee raised a series of issues with managing the trust:

The first issue: the Universal Life policies were substantially underperforming due to market conditions, raising the risk that the coverages would not be in force when needed, unless remediated.

The trustee wanted to employ the traditional remedies but found those remedies inadequate.

The traditional remedies were:
increase the premium- was deemed unacceptable, as some policies would lose their special tax treatment as "life insurance" if premiums were increased, and there was no budget for the increase for the others,

   • decrease coverage- was deemed unacceptable, as the entire $75mm face amount was needed, and furthermore surrender charges would apply if coverage decreased,

   • replace coverage-was deemed not possible, some policies were competitive hence making it pointless to replace, and the grantor couldn't satisfy underwriting requirements , even if economical replacements could be found.

The only remaining remedy was to try to improve the investment performance, by a combination of: rebalancing to the "best " investment subaccounts (configured with the most appropriate asset allocation),  and reducing costs by selecting only index funds ( offering lower internal fees).

The problem was: relying exclusively on improving investment results to shore up the policies would be inadequate, as the task at hand was to: reduce risk without reducing yield, or increase yield without increasing risk.

The second issue: reviewing and evaluating the policies through in-force illustrations.

The very process of ordering the in-forces on all the twenty four policies, tracking their receipt, reviewing the in-forces to ensure that they were "right," then reordering to get the "right ones" etc. was too time consuming, inefficient, cumbersome, and costly.

Furthermore, the in-forces were mostly inadequate in assisting the management of the policies. The reason is: the in-forces could only inform on the premium levels needed to maintain the coverage in force until a specific point in time. That would be inappropriate in many cases, and in any even is only one factor in reducing risk, increasing efficiencies, improving performance.

The trust company asked us to review the case to see if there were other remedies for at a minimum shoring up the underfunded Variable Universal Life policies.

Our very first observation was that: the existing process and methodologies of managing these policies on a policy by policy basis wouldn't be OCC / UPIA compliant, potentially subjecting the trustees to regulatory actions and possible civil liability,

We advised that they could enhance their trust company risk management and compliance by managing all the policies "collectively" on a portfolio level.

We further alerted them that the opportunity of using OCC/ UPIA mandated "portfolio standard" process and methodologies could add a plethora of options that would go a great distance in reducing risk of premature policy lapses, increasing efficiencies, and improving performance for this insurance portfolio.

Going back to the existing insurance agent was not an option as he didn't possess the specialized (and seamlessly multi-disciplined) expertise of operationalizing the OCC/ UPIA provisions, nor the proprietary elements to implement those provisions.

We provided the requisite apparatus, which included distinct decision constructs, and even changed the source of data needed to inform on the portfolio management decisions to enhance risk management/ compliance, reduce the portfolio risk, and increase the portfolio efficiencies and performance.

It freed the trustees up from relying predominately on increasing premiums, reducing or replacing coverage to manage the portfolio, which was very useful as they were inappropriate or undesirable.

It made the annual portfolio management process: faster, simpler, easier, and much more efficient, and provided more "decision defensibility" when communicating with the grantor/ beneficiaries and their advisors.

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