How trustees review and manage life insurance policies varies widely and few, if any, have formal review policies and procedures in place despite the various regulations and the vast array of duties and responsibilities assumed by them.

There are many professional trustees who have retained services to regularly review and assist with the management of these specialized assets. However, for many trustees, the extent of reviewing life insurance policies consists of monitoring the insurance carrier’s financial strength ratings, which is perhaps the least likely source of trustee liability. Some trustees will also obtain an in-force illustration, which is a start in the right direction; however, active policy management must include an ongoing combination of:

  • Monitoring carriers.
  • Reviewing in-force illustrations and annual statements.
  • Evaluating policy performance against an established baseline to ensure optimal performance.
  • Taking appropriate actions to ensure the trust’s goals and objectives are continuing to be met by the policy.
  • Communicating with the grantors and beneficiaries.

Active policy management is imperative on the life insurance policies being sold today and those sold over the last three (3) decades.

Today’s life insurance policies are not static. The policy owner affords a significant degree of flexibility and a number of management options.  For example, many policies give the policy owner the opportunity to affect the policy death benefit by giving them the ability to choose how dividends are to be applied, choices in the death benefit option and whether or not to increase/decrease coverage.  Other policies offer the policy owner the ability to assume more of the associated risk by providing the ability to choose how premiums and cash values are to be invested from a menu of mutual fund like options.  Other policies give the policy owner options as to the amount, timing and duration of premium payments.  However, there’s a caveat—exercising any of these options will directly affect a policy’s performance.

In addition to the policy challenges, additional obstacles can and are presented by the grantors.  Lower investment yields and changes in attitudes may affect the grantor’s willingness to continue to make gifts to a trust.  Because investment income is down, some grantors may be unwilling or unable to continue making significant annual premium gifts to the trust.  Changes in estate tax laws and/or changes to the size of the grantor’s estate may result in a decreased need for life insurance, and thus, require a lower face value than previously required.  Instead of paying premiums, some grantors are choosing to retain the cash previously allocated towards premiums for themselves rather than maintaining the life insurance for future use by their families and heirs. These circumstances can perhaps present the trustee with some of the biggest challenges in managing trust held life insurance policies.  The trustee needs to know what options are available, how to take advantage of the policy’s provisions to sustain coverage, when a policy should be surrendered and when to consider resigning as trustee.  In addition, the growing secondary market for life insurance policies, known as a life settlement, may present opportunities outside the scope of the life insurance contract itself that will allow the trust to access a portion of the policy proceeds prior to the insured’s death or maturity or to receive more than the cash surrender value should the decision be made to terminate the policy.

Download the TOLI Handbook for valuable insight on how to successfully manage life insurance trusts: