Managing Trusts During Market Volatility: A Guide for Trustees

The financial markets in 2025 continue to experience turbulence, with factors like shifting interest rates, inflationary pressures, and geopolitical uncertainty all contributing to volatility. For most investors, market swings are concerning. But for trustees managing Irrevocable Life Insurance Trusts (ILITs), volatility introduces unique challenges and fiduciary responsibilities.

Life insurance is often viewed as a stable, long-term asset, but many policies — particularly variable and universal life products — are directly impacted by economic shifts. As a trustee, your duty is not just to hold the asset but to actively manage it. 

Lessons from Our Recent Webinar

In our recent webinar, “Stay the Course: Managing Variable Life Insurance in a Choppy Market,” our experts highlighted several key issues trustees face when managing policies during market swings:

Policy Design Matters: Many variable universal life (VUL) policies sold in the late 1990s and early 2000s were illustrated at overly optimistic earnings rates — sometimes 10–12%. These assumptions have often failed to materialize, leaving policies underfunded. 

The Shift in Risk: As our panel explained,  variable life products shifted investment risk from carriers to policy owners. That means trustees bear responsibility for allocation choices and performance monitoring. 

Allocation Challenges: Some policies have over 100 subaccount options; others have fewer than 10. Without a defined process, trustees risk allocations that are too conservative (such as money market accounts) or too aggressive. Both extremes can threaten policy sustainability. 

Trustee Liability: If a policy lapses or underperforms due to mismanagement, beneficiaries may allege breach of fiduciary duty. One speaker emphasized: “Courts care more about process than perfection.” 

How Market Volatility Impacts ILIT Policies 

Market fluctuations can significantly affect ILIT policies in several ways. For universal life policies, interest crediting rates that are tied to market conditions may cause cash values to shrink, which could require higher premiums to maintain coverage. At the same time, rising costs of insurance (COIs) can shorten policy duration if trustees do not respond proactively. Premium schedules that were set years ago may no longer be sufficient under current market assumptions, potentially creating funding gaps. Finally, without clear communication with beneficiaries, shortfalls caused by market volatility can lead to misunderstandings, disputes, or a loss of trust in the policy’s management. 

Trustee Strategies in Volatile Markets

1. Establish a Review Process: Our panel emphasized that annual reviews are essential for variable and indexed products.
2. Run Multiple Scenarios: Trustees should request in-force illustrations under “base case” and “stress test” assumptions. This reveals whether increased funding, face amount reductions, or other adjustments are needed.
3. Standardize Asset Allocation: As discussed in the webinar, trustees must apply consistent models—whether aggressive, moderate, or conservative — based on the insured’s life expectancy and policy funding adequacy.
4. Evaluate Subaccounts Carefully: Fund selection should weigh performance history, expenses, risk metrics, and diversification. One case study shared during the webinar highlighted a trust policy stuck in a money market subaccount for over 15 years—leaving it badly underfunded.
5. Communicate and Document: Educating grantors and beneficiaries is essential, but so is keeping thorough documentation. As one expert noted, beneficiary sign-offs and indemnification language may be appropriate if grantors insist on specific allocations. 

Best Practices for Long-Term Resilience

• Track all deadlines, premium due dates, and allocation restrictions.
• Incorporate suitability updates — does the policy still fit the trust’s needs?
• Charge appropriately for the additional oversight required with variable policies. As noted in the webinar, most trustees aren’t, but regulators expect evidence of a defined process. 

Conclusion

Market volatility may be out of your control, but how you respond as a trustee is not. With a defined review process, consistent asset allocation models, strong communication, and documented decisions, trustees can protect both the trust’s assets and their fiduciary position.

For a deeper dive into this topic, watch the full recording of our recent TrustEd webinar, “Stay the Course: Managing Variable Life Insurance in a Choppy Market.”