Trustees of Irrevocable Life Insurance Trusts (ILITs) are charged with managing life insurance policies in a fiduciary capacity. If left unmonitored, an underperforming policy can compromise the trust’s objectives, reduce the intended death benefit, or even lapse altogether. Trustees who fail to recognize and respond to performance issues could be put in a liable situation.
Life insurance isn’t a “set it and forget it” asset. Policies are complex, long-term contracts with moving parts that must be managed over time. Factors like interest rate changes, market performance, insurer actions, and shifts in trust objectives can all affect policy outcomes.
Nearly half of all ILIT policies will require some form of remediation during their lifetime. Without regular monitoring and action, these issues can catch trustees and beneficiaries off guard—sometimes with costly consequences.
Key Red Flags of TOLI Policy Underperformance
Here are the most common indicators that a life insurance policy may not be performing as expected:
Falling Cash Values
Cash values are crucial to the sustainability of many permanent life policies. If the cash value is not growing—or worse, is decreasing—it’s a sign that internal costs may be outpacing gains, jeopardizing the policy’s long-term viability.
Premium Sufficiency Issues
If current premium payments are no longer sufficient to carry the policy to the insured’s life expectancy or maturity date, the policy has a funding issue. In these cases, additional funding or structural adjustments may be necessary to keep a policy from lapsing.
Cost of Insurance (COI) Increases
COI charges are internal costs that can significantly impact cash value and policy duration. In recent years, many insurers have increased COIs on older blocks of business, often without warning. These increases can shorten policy life spans or require higher premiums to maintain coverage.
Infrequent or Outdated Reviews
A policy that hasn’t been reviewed in over a year is at risk of drifting off course. Annual in-force illustrations should be a baseline requirement for trustees, with more frequent reviews warranted for complex or market-sensitive products.
Unexplained Changes in Projections
Sudden shifts in policy values, projected death benefit durations, required premiums, or missed/insufficient premiums can signal underlying performance issues. These changes should always be investigated, regardless of whether a notice was received from the carrier.
Missed Term Conversion Opportunities
Trustees must also track critical deadlines—like the ability to convert term policies to permanent insurance. If these deadlines are missed and the insured’s health has deteriorated, the trust could lose its ability to secure permanent coverage entirely or be forced to pay the increasing premiums after the level period expires.
What Trustees Should Do When Red Flags Appear
Identifying red flags is important, but responding appropriately is what fulfills a trustee’s duty. Here are the steps trustees should take:
Communicate with Stakeholders: If the insured is alive, discuss the issue with the grantor. Beneficiaries should also be kept informed, especially if the trust’s objectives may be compromised. Transparency is key to managing expectations and avoiding disputes.
Evaluate Remediation Options: Remediation strategies may include increasing premium payments, reducing the face amount, restructuring the policy, or replacing it entirely. Each option carries pros and cons, and the decision should be based on the trust’s goals, the insured’s health, and available funding.
Document the Entire Process: Every step taken—from identifying the issue to evaluating solutions and communicating with beneficiaries—should be thoroughly documented. Courts and regulators evaluate trustees based on the prudence of their process, not just the outcome.
Read More: The Many Duties and Responsibilities of a TOLI Trustee
Conclusion: Don’t Wait for the Policy to Fail
TOLI policy underperformance is common, but it doesn’t have to be catastrophic. Trustees who remain vigilant, engage qualified experts, and maintain a disciplined, well-documented process can manage risk effectively and ensure trust objectives are met.
The most costly mistake a trustee can make is assuming everything is fine without verifying it. A proactive approach to performance monitoring is not only good practice—it’s a critical part of fulfilling your fiduciary duty. If the day-to-day administration work associated with ILITs is weighing on your other duties, set up a consultation with our team to learn how using LITCO as your successor trustee can eliminate that workload and the associated liability.
