A TOLI trustee we work with received a request from a grantor tired of gifting to pay premium on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage. The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured.
While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit).
Trustee choices in this case:
- Guaranteed $3.9 million of coverage with increasing cash value.
- Non-guaranteed $3 million of coverage with decreasing cash value.
While it seems easy to see the prudent decision is number 1, it was not easy to see at the time. Why? Because the trustee did not have all the information or the requisite skill to gather and analyze all the information. In the decade we have been reviewing TOLI policies – including replacement options – this lack of knowledge and skill has been the weak link for trustees managing ILITs.
And this is a growing problem. We cite 6 case studies in the TOLI Handbook, each with its challenges, each representing potential liability to the TOLI trustee if handled incorrectly. And we could have added more real-life situations we have encountered.
If you are a TOLI trustee what do you do when:
- You take on a portfolio of whole life policies with growing loans?
- A grantor tells you to surrender their policy or allow it to lapse?
- Grantors say they want to replace their variable universal life policy with a “more conservative” equity index universal life policy?
We guide you through these situations in the TOLI Handbook, a free 155-page PDF we believe represents the best single source of information available for managing TOLI trusts and life insurance.
With the changes in the federal estate tax exemption, you will be receiving more of these types of requests. They will mean much more work, and more important, much more liability for you.
For a FREE copy, please go to www.TOLIHandbook.com.