Trusts often rely on insurance policies for a variety of purposes, and if trustees do not actively manage those policies, it could cause trouble for both trust and trustee. However, many trustees don’t even realize they have to do anything with an insurance policy but distribute the funds once the death benefit comes in.
John Ryan, of Ryan Insurance Strategy Consultants in Greenwood Village,Colo., said during a recent webinar on the subject that many times an insurance policy is the only asset in a trust. But while it’s a trustee’s duty to select and monitor policies, he cited the Stephan Leimberg insurance newsletter for some surprising statistics: 81% of the time, trustees had little or no guidance from the grantor about how to treat life insurance policies in the trust—nothing about how often to review or what to look for. Perhaps, given that figure, it’s not all that surprising that 69% of trustees have not reviewed the policies in their care in the last five years.
That’s a big red flag. Trustees have a fiduciary duty under the Uniform Prudent Investment Act (UPIA) to review trust-owned life insurance policies, and they are further required to produce reasonable returns, said Ryan. Failure to do so could send unhappy beneficiaries to court—which means big trouble for the trustee—and over half the policies in trusts are underperforming.
Advisors whose clients are trustees, or who perhaps serve as trustees themselves, should be aware that a regular review can reveal the policies they oversee that fail to perform. If they do not feel prepared to tackle such a review, and many don’t, they should consult an expert.
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Volunteer trustees, or those with no experience, may have been chosen by the client because of a personal relationship, not their knowledge of a trustee’s duties. They may have no idea that they are liable for the performance of the trust, or they may feel they’re not qualified to carry out an examination of the policy’s performance. If they do give it a shot, they could feel as if they’re drowning in paperwork from the insurance company. And if the person who bought the policy doesn’t want to get involved, that can make it harder.
Professionals such as accountants, attorneys and planners might be reluctant to demonstrate a lack of expertise on the subject, or to expose themselves to liability for taking on a task they’re really not qualified for. However, said Ryan, “if you hold yourself out as a comprehensive financial planner, this is an area you have to delve into to do what’s right by the client.”
Or the problem could be the agent, who may have a personal relationship with the donor that makes any change or suggestion of poor performance difficult. Alternatively, the agent could be prejudiced in favor of a certain type of policy or, even if he advises a change, simply more concerned with an opportunity for additional profit than with making sure a new policy will perform better.
Many things can affect that performance, including the timing of the purchase. Ryan cited an instance in which a client bought a variable life policy a year before the market dropped 40%. “These products are so highly sensitive,” he said, “that when a loss like that is sustained in the first few years, it’s difficult for the policy to catch up. If they’re not monitored and managed like an investment, there could be dire consequences later on.”