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Trust-Owned Life Insurance (TOLI)- To Have and to Manage

Patrick J. Marget, JD, CPA, CFP, CLU- Managing Director

Facts:

• 25% of non-guaranteed TOLI will lapse during the insured’s lifetime, even with current scheduled premiums being paid.
• More than 70% of TOLI policies have no servicing agent.
• 83.5% of trustees have no policies or protocols in place to review existing policies.

These are just some of the dangers and problems of many life insurance policies, including ones that are owned by a trust. To compound the problem, majority of the trust-owned life insurance (TOLI) policies are owned by trustees that are not skilled in the ongoing management of these policies, and they receive little to no guidance from the insurance advisors that sold the policies or the “grantor-clients”.

The TOLI policies that are at the greatest risk of the above issues are non-guaranteed universal life, variable universal life or “adjustable” life insurance policies that were issued in the 1980’s through early 2000’s. During this time, these policies were illustrated and purchased assuming high interest crediting rates or rates of return based on market performance. As a result, policies could be illustrated at much lower annual premiums. As rates have come down since this time, these policies are now not performing near as well as initially illustrated and are at an increased risk of lapsing. Simply put, many policies were initially designed and illustrated so that “not enough gas is being put into the engine to keep the engine running forever.”

Perform ongoing review and management of TOLI policies.

Trustees cannot fall into the false pretense that the TOLI policies were a “buy and hold” strategy. Instead trustees must view these policies as “buy and manage.”

One fundamental step in managing existing TOLI policies is to request inforce ledgers (IFLs) from the existing insurance carrier or insurance advisor. The IFL will provide insight as to the future illustrated performance of the policy under various assumptions. At a minimum, requesting IFLs for the following assumptions would be prudent:

1. Current non-guaranteed crediting rates with current policy charges;
2. Guaranteed crediting rates with guaranteed policy charges;
3. Guaranteed crediting rates with current policy charges; and
4. Some stated crediting rate with current and guaranteed policy charges.

If the IFLs indicate that there is a risk of the policy lapsing before or near life expectancy, then corrective action will be needed. Any decisions on correcting policies must be done by the owner (i.e., the trustee for TOLI policies), and such action will typically take the form of the following:

1. Premium increase;
2. Reduction in the death benefit;
3. Exchange of the TOLI policy to a more suitable policy (assuming that a 1035 exchange is available as new underwriting would be required); or
4. A combination of any of the options above.

Bottom Line:

Studies show that many TOLI policies are at risk of lapsing before life expectancy, and few trustees are properly managing these policies to understand if this is a risk. Ongoing management is a must to determine if corrective action needs to be taken to avoid this risk.

If you have questions or would like further information about Trust-Owned Life Insurance (TOLI) policies, please CONTACT Executive Benefits Network.