Risk Management and the  Evaluation of Life Insurance  Policies For the Professional  and Amateur Trustee, And  Anyone Else Who is  Interested       Gary L. Flotron, MBA, CLU®, ChFC®, AEP®  University of Missouri – St. Louis  G. L. Flotron & Associates  St. Louis, Missouri      San Antonio Estate Planning Council  San Antonio, Texas    December 16, 2014 IMPORTANT DISCLAIMERS AND NOTICES These materials are intended for educational purposes only. They are designed to provide accurate and authoritative information in regard to the subject matter covered. However, Gary L. Flotron is not offering any type of legal, accounting, insurance, investment or other professional advice in these materials. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. These materials are provided solely for educational purposes. These materials cannot be sold, copied, reproduced or distributed in any form or manner whatsoever without the express written consent of the authors. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U. S. Internal Revenue Service, we inform you that any tax advice contained in this document (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax‐related penalties under the U. S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax‐ related matters addressed herein. Copyright © 2014 Gary L. Flotron, MBA, CLU®, ChFC®, AEP® All rights reserved. Reproduction in whole or in part without written permission of Gary L. Flotron is prohibited. Table of Contents Gary L. Flotron, MBA, CLU®, ChFC®, AEP® Bio Presentation Abstract Presentation PowerPoint Slides Handout Sample TOLI Investment Policy Statement – E. Randolph Whitelaw, AEP® (Distinguished) Monte Carlo Simulation and Actuarially Certified Policy Standards Analysis – Gary L. Flotron, MBA, CLU®, ChFC®, AEP® Dispute Defensible ILIT Administration and TOLI Policy Evaluation Checklist – Lawrence Brody, JD, LLM, AEP® (Distinguished); Gary L. Flotron, MBA, CLU®, ChFC®, AEP®; Richard A. Schwartz, FSA, MAAA,CLU®; Richard M. Weber, MBA, CLU®, AEP® (Distinguished); E. Randolph Whitelaw, AEP® (Distinguished) Suggested Readings with Comments – Gary L. Flotron, MBA, CLU®, ChFC®, AEP® Gary L. Flotron, MBA, CLU®, ChFC®, AEP® Gary L. Flotron is principal of G. L. Flotron & Associates, and specializes in estate and business planning, and executive and employee benefit plans. He is also an Adjunct Faculty member at the College of Business Administration, University of Missouri - St. Louis, where he teaches courses in estate and trust planning, planning for business owners and professionals, employee benefits and life insurance. In addition, he is an Adjunct Professor with The American College of Bryn Mawr, Pennsylvania. An author and frequent national speaker, Gary has spoken to numerous professional associations and groups. Mr. Flotron has been an active member in various professional associations. He is Chair Emeritus and a Member of the Executive Committee for the Synergy Summit, an organization and think tank composed of representatives from ten major national legal and financial services professional organizations involved in estate planning. Previously he has served on the Executive Committee and is a Past Chair of the Professional Education and Development Committee for the Synergy Summit. He is a Past President of the National Association of Estate Planners & Councils (NAEPC) and The NAEPC Education Foundation, as well as past Chair of The NAEPC Education Foundation Committee and past Chair of the Accredited Estate Planner® (AEP®) Designation Committee for NAEPC. A past Member of the National Board of Directors of the Society of Financial Service Professionals (FSP), Mr. Flotron, in addition to having served on numerous National Committees and Task Forces, is the current Editor of the Estate Planning Section Newsletter for FSP. He is also a member of the University of Missouri – St. Louis Planned Giving Advisory Committee. A past President of the FSP Greater St. Louis Chapter, Gary is also a past President of the Estate Planning Council of St. Louis, and past President of the National Association of Insurance and Financial Advisors St. Louis Chapter. He is a past Member of the Board of Directors of the Foundation for Financial Service Professionals and a past Regional Chair for the National Council of The American College. Mr. Flotron has also served as a Member of the Chartered Financial Consultant (ChFC®) Curriculum Advisory Board for The American College. An MBA graduate of the Washington University John M. Olin Graduate School of Business Administration, where he was inducted into Beta Gamma Sigma, the National Business Honors Fraternity; Flotron completed his undergraduate work in engineering management with a concentration in electrical engineering (B.S.E.Mgt.) at the University of Missouri at Rolla (now Missouri University of Science and Technology). He received the Chartered Life Underwriter (CLU®) designation in 1984 and the Chartered Financial Consultant (ChFC®) designation in 1985, both granted by The American College. In 1995 he was awarded the Accredited Estate Planner® (AEP®) designation by NAEPC. Gary is the 1996 recipient of the Stan Towerman Excellence in Professional Education Award from the FSP Greater St. Louis Chapter, and a 1994 recipient of the Paul F. Mills Scholarship from the Foundation for Financial Service Professionals. He was inducted into the National Association of Insurance and Financial Advisors St. Louis Chapter Hall of Fame in 2003. The University of Missouri – St. Louis named Mr. Flotron as the recipient of the 2014-2015 Chancellor’s Excellence Award for a Part-time Faculty Member. In addition to his professional activities, Flotron is involved in other civic and social organizations. Some of the organizations and activities that he has been involved with include: The St. Louis Zoo; St. Louis Zoo Safari Club; Retired Greyhounds As Pets (REGAP); Rescued Racers; Wild Canid Survival and Research Center (Wolf Sanctuary); The World Affairs Council of St. Louis, host for foreign dignitaries and international visitors; World Trade Club of St. Louis; Missouri Athletic Club; and various political campaigns, including being the Campaign Committee Chair for (Franc) Flotron for Congress 2000. He is also a past President of the Frontenac Forest Subdivision. Gary has two sons, Paul and John, a daughter in law Anna who is married to John, and one grandson, Luke, and one granddaughter, Liliana. Flotron's hobbies include reading and learning, traveling, exercising, hiking, modern era architecture, photography, and walking/running his greyhound Jackson (at least in spirit and until he gets another greyhound). Gary’s response when asked “what is something about you that is unique and most folks are unaware of?” is “that he had a dinner party in his home for a man that subsequently led a coup d’état and is now the President/Dictator of an African country.” September 15, 2014 Risk Management and the Evaluation of Life Insurance  Policies For the Professional and Amateur Trustee, And  Anyone Else Who is Interested  Gary L. Flotron, MBA, CLU®, ChFC®, AEP®  Abstract  With the advent in the late 1970s and late 1980s of flexible premium, non‐guaranteed universal  life insurance, or any other policy whose performance is based on nonguaranteed elements,  the risk of policy sustainability, performance and solvency was shifted from the life insurance  carrier to the policy owner.  Yet the nature of this risk shift, the risks assumed, the effect of  volatility in investment returns, both for fixed accounts and equities, on policy account values,  and the inadequacy of the traditional policy illustration tool to measure and account for these  risks, is either, at best, completely misunderstood or, at worst, thoroughly ignored; resulting in  policy insolvency and lapse.  This is particularly a problem for trust‐owned life insurance (TOLI)  where the trustee is under a fiduciary duty to manage the risks and monitor the performance of  the trust estate policy assets.  This presentation will explore the risks in life insurance policies  and provide a process for managing the life insurance policy risk, as well as the proper “dispute  defensible” evaluation of non‐guaranteed life insurance policies, which account for policy  return volatility and place a statistical confidence of probability on policy results. 11/4/2014 Risk Management and the Evaluation of Life Insurance Policies For the  Professional and Amateur Trustee, And  Anyone Else Who is Interested San Antonio Estate Planning Council San Antonio, Texas December 16, 2014 Gary L. Flotron, MBA, CLU®, ChFC®, AEP® University of Missouri –St. Louis G. L. Flotron & Associates St.  Louis, Missouri Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 1 IMPORTANT DISCLAIMERS AND NOTICES These materials are intended for educational purposes only. They are designed to  provide accurate and authoritative information in regard to the subject matter  covered. However, Gary L. Flotron is not offering any type of legal, accounting,  insurance, investment or other professional advice in these materials. If legal  advice or other expert assistance is required, the services of a competent  professional person should be sought.  These materials are provided solely for educational purposes. These materials  cannot be sold, copied, reproduced or distributed in any form or manner  whatsoever without the express written consent of the authors. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U. S. Internal Revenue  Service, we inform you that any tax advice contained in this document (including  any attachments) was not intended or written to be used, and cannot be used, by  any taxpayer for the purpose of (1) avoiding tax‐related penalties under the U. S.  Internal Revenue Code or (2) promoting, marketing or recommending to another  party any tax‐related matters addressed herein. Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 2 1 11/4/2014 Risk Management and the Evaluation  of Life Insurance Policies For the  Professional and Amateur Trustee,  And Anyone Else Who is Interested Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 3 Risk Management and the Evaluation of Life  Insurance Policies For the Professional and Amateur  Trustee, And Anyone Else Who Is Interested Topics, Issues and Take Homes • The Ticking Time Bomb of the TOLI Insolvency  Crisis • Key Word is Managing • Risks of Life Insurance Policies • Process of Managing Life Insurance Policies • Evaluation of Life Insurance Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 4 2 11/4/2014 The Ticking Time Bomb of  the TOLI Insolvency Crisis Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 5 The Ticking Time Bomb of the TOLI Insolvency Crisis • The TOLI Center, LLC (TTC), a Fee‐Based Policy Administration and Risk  Management Services Firm Since 1992, Whose Clientele Includes Skilled  and Unskilled Trustees, Attorneys, Affluent Family Groups and ILIT  Beneficiaries, Has Maintained Portfolio Statistics (TOLI Specific Statistics  Are Unavailable From Traditional Life Insurance Sources) • According to the TTC Statistics As of October 2013, Approximately 40% of  In‐Force Universal and Variable Universal Life Products Are Carrier  Illustrated  to Lapse Prior to the Insured’s Estimated Life Expectancy or  Within Five Years of the Insured’s Estimated Life Expectancy • Further, According to TTC Approximately 12% of Whole Life and  Guaranteed Universal Life Policies Have Compromised Guarantees • Reliable Data About Life Insurance Polices Owed in ILITs Is Unavailable Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 6 3 11/4/2014 The Ticking Time Bomb of the TOLI Insolvency Crisis (Continued) • Since 1993, TOLI Risk Management Articles Have Suggested  That Unskilled, Brother‐In‐Law Like Accommodation Trustees  Administer Up to 90% of the In‐Force Policies in ILITs • If The TOLI Center Statistics, Whose Clientele Are Extremely  Sophisticated, Mostly Skilled Professionals, Suggest a 40%  Insolvency or Lapse Rate with TOLI Policies, What Is That  Statistic For the Vast Majority of Unskilled, Accommodation  Trustees?  60%?  70%? 90%? Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 7 The Ticking Time Bomb of the TOLI Insolvency Crisis (Continued) • The Purpose of This Presentation Is To Review  Trustee Duties Through: – Explore Life Insurance Policy Risks that Have and  Can Cause TOLI Insolvency and Lapse – Discuss the Proper TOLI Risk Management Process  That Can Prevent the TOLI Crisis – Examine the Proper Evaluation of Non‐Guaranteed  Life Insurance Products Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 8 4 11/4/2014 Key Word is Managing Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 9 Key Word is Managing Crossover Point – The Great Divide • Prior to 1979 – Buy and Forget • 1979 and After – Buy and Manage • The Great Divide Caused by the Introduction of Universal Life  Insurance by E.F. Hutton Life Insurance Company in 1979 • Yes, Life Insurance Has Risks that Have to be Manage Copyright (c) 2014 Gary L. Flotron, MBA, CLU, ChFC, AEP  All rights reserved. 10 5