Recently, we updated a survey based on statistics from the Trust Owned Life Insurance portfolios of our clients. The information gathered was insightful, especially when contrasted with an original survey done ten years ago. TOLI Trustees will continue to be faced with increased liability as aging TOLI portfolios will make the management of policies more challenging.
Portfolio Current Insured Age
The aging trend in both society and TOLI portfolios is evident, with a significant rise in the 80-90 and 90 plus age groups over the past decade, comprising nearly a quarter of the portfolio. Longer lifespans contribute to this shift, impacting portfolio dynamics. Rising life insurance costs with age pose challenges, particularly for underfunded policies. As health declines and policies falter, managing policies becomes increasingly complex, emphasizing the growing significance of utilizing Life Expectancy (LE) Reports for informed policy decisions.
Portfolio Policy Type
A decade ago, Whole Life policies dominated trust holdings, representing over 40% of the portfolio, but now they account for just over 30%. Term policy usage has decreased from 17% to under 13%. Universal Life (UL) policies have surged by nearly 50%, now comprising over 43% of portfolios.
Guaranteed death benefit UL products, with mandatory premium payments, have gained prominence, while Equity Indexed products have grown, some with unrealistic expectations. Variable Life policies slightly increased, demanding careful management due to equity market volatility. Current Assumption UL policies, long industry mainstays, now face challenges with rising Cost of Insurance (COI) affecting policy health. Multiple challenges stem from these product shifts.
Average Crediting Rates
For the past 7 to 8 years, the life insurance industry has faced significant pressure due to the 2008-2009 market correction and persistently low interest rates on fixed investments. Most life insurance policies heavily rely on fixed investments. Universal Life policies have a credited current rate, a guaranteed minimum rate, and a projected rate at issuance.
Current credited rates in these policies are lower than the originally projected rates, with many new Current Assumption Universal Life policies offering guaranteed rates of 3% or less, contrasting with the previous average guaranteed rate of nearly 4%. These changes are largely attributed to the prevailing low interest rates, often blamed for the rise in the cost of insurance (COI).
Policy Duration
Over time, aging life insurance policies become more complex, affected by declining credit and dividend rates. Discrepancies often exist between funding patterns and sales illustrations. Changing trust objectives may necessitate policy adjustments.
As portfolios age, the associated risks and tasks escalate. In the recent survey, 30% of policies exceeded 20 years and 10% surpassed 30 years, intensifying challenges for trustees without the skills to analyze and adapt policies to evolving conditions, indicating increased trustee risk compared to a decade ago.
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