Clients establishing trusts depend upon the professionals they hire as trustee or advisor to ensure that their wishes meet the objective set forth. Trustees and other professionals that bear this responsibility to include and not limited to that of the Uniform Prudent Investor Act, must:

  • Provide a written and measurable review that meets the specification in the UPIA
  • Analyze Suitability, COI, Carrier Financials, Historical Performance and Liquidity
  • Provide a comparison of premiums, internal expenses, CSV to an index/benchmark or
  • average of other policies
  • Keep in mind a report that tracks carrier health, lapse exposure and competitiveness does
  • not fulfill all 3 duties – possibly just the duty to monitor
  • Be aware a Lapse Risk Analysis alone does not fulfill the fiduciary duty
  • Be aware if the review was completed by part of the professionals staff, themselves or the insurance company then it is potentially not independent or potentially the current agent/advisor
  • Fulfill all 3 fiduciary duties to Monitor, Investigate and Manage
  • Identify the strengths and weaknesses of the current policy versus trust objectives and other
  • products available
  • Examine ALL expenses and potential overpayment on premiums
  • Understand and be aware of the financial strength and claims-paying ability of the carrier  Provide documentation for the reasonableness related to expected rate of return on assets underlying the cash values
  • Be aware of and manage the 5 major factors of Suitability that are mandated by state law (Sections 2 and 7 of UPIA) and federal regulation (OCC Title 12, Part 9.6)
  • Document internal cost of insurance, administrations expenses and cash-value-based fees  Handle gifts to trusts, provide notice of gifts and meet premium payment deadlines

Studies have shown several liabilities and issues hovering over the professionals overseeing these risks such as the surveys from Trusts and Estates which stated that anywhere between 70-95% of TOLI have no current servicing agents. This survey looked at approximately 550 trustees. Of the professional trustees, fully 83.5% indicated they had no guidelines and procedures for handling trust owned life insurance (TOLI).

Both groups did not focus closely on handling the subaccounts for variable life. Among professional trustees, 95.3% had no guidelines for handling the asset allocation components of VL. Among nonprofessionals, 94.7% indicated they had no procedures in place for the allocation component of VL.

This would appear to indicate that many trust owned policies are simply in a maintenance mode. One professional trust owned life insurance service firm indicated that as many as 92% of existing TOLI policies could be restructured to provide 20% greater value. In fact, that same firm concluded, after a survey of policies, that 74%-87% of these contracts could be restructured to provide either a 40% increase in death benefit, or 40% reduction in premium.

Trustees continue to face increased scrutiny of their investment performance in volatile market environments in addition trustees of trusts holding life insurance face additional challenges in their management of this asset class as well.

The UPIA provides invaluable guidance as to the specific activities trustees can and should take under a management model for trust-owned life insurance such as;

  • The “duty to monitor” the performance of trust holdings
  • The “duty to investigate” the suitability of trust holdings

The duty to manage trust holdings using the information gathered in duty #1 and duty #2 to minimize costs and maximize benefits relative to acceptable levels of risk.

Trustees can delegate investment and management functions, and when properly delegated are “not liable for the decisions or actions of the agent to whom the function was delegated.

Be careful with relying solely on the selling or servicing agent/broker for advice. While many agents/brokers market themselves as independent, most are not and instead have duties to promote their employer’s interests and/or are limited by terms of their contracts with some limited number of insurers. They may also have a conflict of interest with regard to policy replacement and are often not trained in financial analysis or fiduciary principles or law.

Be aware of “prudence” as defined under the Prudent Investor Act, this requires that trustees follow a “prudent process” which includes making a reasonable effort to verify facts relevant to the investment and management of trust assets. Keep in mind the amount being paid for COI and other expenses are clearly “facts relevant to the investment and management of trust assets.” Therefore this could create an increased risk of lapse, and certainly “relevant to the investment and management of trust assets.”

These risks and processes are integral to maintaining a professional and prudent business. Other crucial issues include 101j and the remarkable impact it has on several policies in the business market completely ignored by most advisors, agents and other financial professionals.

We look forward to discussing this in future articles.

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