Trust Owned Life Insurance

TOLI Advisory Services

A key responsibility of the trustee is to have a disciplined investment process that seeks the  greatest return for the least amount of risk. In order to help minimize potential trustee liability with respect to trust owned life insurance, it is advisable that you develop an investment policy statement (IPS - for the purpose of documenting this process).  At a minimum, the IPS should cover the following:

• Duties and responsibilities of the trustee with respect to trust owned life insurance.
• The purpose for the coverage.
• Type of coverage to be held by the trust, based on the designated risk tolerance.
• Premium level to adhere to, based on grantor’s gifting limitations.
  

In addition, a key component of an IPS is a commitment to regularly review each policy owned by the trust. Chances are, many things have changed since the life insurance was purchased. It is your responsibility as the trustee to ensure that the life insurance is performing as expected and is providing the best possible benefit for the trust beneficiaries. Reasons you need to have the life insurance reviewed regularly include:

Ø Policies may not be performing as projected due to market downturns over the past few years or                     historically low interest rates

• Policies may be at risk of lapsing, leaving the trust beneficiaries with nothing and you with a major potential liability for failing to properly moniter the policies.
• Grantors may have to make larger premium gifts than expected to keep the policies in force that could possibly cause the grantors to exceed their annual exclusions?
• Grantors may have to make premium gifts for longer period than expected. What if the premiums are dependent on gift splitting and one is not likely to live through an extended premium-paying period?

Ø Newer products may have been developed that might be more cost efficient or offer better guarantees.

• It may be possible to pay less premium for the same coverage or obtain more coverage for the same premium.
• Guaranteed death benefit universal life, which is a relatively new type of life insurance product in the marketplace, can often provide the same guaranteed death benefit as whole life at a lower cost.

• What was once considered rated for under writing purposes might be standard today and cost less. 
• Improved health or lifestyle changes may have occurred, providing the potential for better underwriting offers and lower premiums.
  

Ø The amount of life insurance needed might have changed, current coverage could be insufficient.

Ø  Changes in insurer financial ratings could put the policy at risk because the company backing it is at risk.

SRSSI. Client Centered. Process Driven.

Case Studies*

Trusts Holding Fixed Insurance Products:

Charlie and Stella set up their estate plan 10 years ago. As part of the plan, they set up an ‘V irrevocable trust and the trustee purchased two second-to-die policies on their lives from two different companies. One was a participating whole life contract, the other was a universal life contract. The couple has diligently made gifts for premium payments each year, and the trust has worked well. However, nobody — including the trustee — has reviewed the life insurance policies.

At the urging of their life insurance advisor and their CPA, Charlie and Stella contacted the trustee and asked to have the policies reviewed. As it turned out, both policies were not performing as expected. Both were sold to them using assumptions that, while reasonable for the economic climate 10 years ago, are unrealistically high in today’s environment. The participating whole life policy was at risk to fail because of dividend cuts over the last 10 years. The universal life policy was being credited a rate a full 550 basis points lower than the illustration on which the policy was sold. For that policy to stay in place, an additional 12 years of premiums over the original design would be required.

Trusts Holing Variable Insurance Products:

Bill established an irrevocable life insurance trust for the benefit of his children several years ago.  At the time, the country was in the midst of a bull market, so the decision was made to have the trust purchase a variable life insurance policy insuring Bill. Unfortunately, the market declined substantially soon after the purchase of the policy. Although the market has recovered somewhat, a recent policy review has revealed that Bill’s policy is in danger of lapsing unless substantial premiums are paid into the policy. Bill is willing to make the necessary additional premium gifts, but given the past performance of the market, he now wants the assurance that the policy will stay in force for his life regardless of future market performance.

Trust Holding Second-to-die Policy in which One of the Insureds is Now Deceased:

Todd and Sue set up the irrevocable trust 15 years ago and the trustee purchased a second-to-die contract on their lives. Todd passed away two years ago, leaving Sue as the surviving insured. As a result of a policy review, it has been determined that exchanging the old second-to-die policy for a new individual life policy insuring Sue increases the total coverage by $500,000 without increasing the costs or risks, thus providing the best possible benefit for the trust beneficiaries.

At the urging of their life insurance advisor and their CPA, Charlie and Stella contacted the trustee and asked to have the policies reviewed. As it turned out, neither policy was performing as expected. Both were sold using assumptions that, while reasonable for the economic climate 10 years ago, are unrealistically high in today’s environment. The participating whole life policy was at risk to fail because of dividend cuts over the last 10 years. The universal life policy was being credited a rate a full 550 basis points lower than the illustration on which the policy was sold. For that policy to stay in force would require an additional 12 years of premiums over the original design.

Estate Has Increased Substantially

John and Sarah did their estate planning 15 years ago. Back then, it was determined that they ‘V had an estate liquidity need of $5 million. As a result, they established an irrevocable trust and had the trust purchase $5 million of second-to-die coverage on their lives. Since they did their original estate planning their estate has increased in value by $10 million. As a result of a policy review, it is discovered that the amount of their existing trust owned life insurance is not sufficient to provide the estate liquidity they need and desire.

A Life Insurance Review is Not a Replacement Program.

Instead, it is part of an ongoing assessment of your (TOLI) Trust Owned Life Insurance. We can help you to analyze existing life insurance owned by the trust to determine if it is appropriate for the needs of the trust beneficiaries and whether the type and performance of the life insurance are aligned with the trust’s goals.

Provided By:  Mark Kandarian