With interest rates at record lows, trust-owned life insurance (TOLI) should be reviewed regularly to determine the risk of lapse. However, many trusts are administered by family members or others who lack the expertise to conduct policy reviews. Insurance agents have an opportunity to become a valuable member of the estate planning team by offering to review TOLI universal life policies and making recommendations for policies on the verge of lapse.
As the cornerstone of an estate plan, TOLI enables the trust to provide a cash inheritance to survivors, to cover estate taxes, liquidate debit, or create a legacy through charitable gifts. But because of its long-term investment horizon to maturity, a trust-owned life insurance policy is often overlooked by those monitoring or managing the overall trust.
According to an analysis of life settlements conducted several years ago, approximately 40 percent of life insurance policies sold in the secondary market involved trust-owned life insurance. However, given the recent developments explained above, it is likely the percentage of TOLI policies sold in the secondary market will increase substantially in the future.
Insurance advisors have an opportunity to play a key role in salvaging TOLI policies on the verge of lapse. In cases where the policy is at risk of lapse without a substantial infusion of cash to keep it in force, the reviewing professional may want to recommend to the client that a life settlement is a prudent course of action to explore.
Tips for insurance advisors when talking to clients:
Below are four tips that agents should have “top-of-mind” as they discuss this topic with clients, trustees, bank trust departments, estate attorneys, and beneficiaries of trusts:
- Provide historical background information: Explain to your clients and referral sources that many older universal life policies were purchased “back in the day” when interest rates were substantially higher and the anticipated dividends were intended to fund future premium payments. Given the current interest rate environment, many of these TOLI policies may be on the verge of lapse.
- Become a trusted resource to other professionals: Grantors often appoint trustees who are family members or friends with no formal training as it relates to reviewing policy illustrations or managing investments. Agents should consider inviting an estate planning attorney to lunch to discuss the challenges of having their clients name family members as trustees when it involves overseeing trust-owned life insurance.
- Cite Statistics: According to an article published earlier this year by LifeHealthPro, it is estimated that 90 percent of in-force trust-owned life insurance policies are administered by amateur trustees. And furthermore, approximately 38 percent of in-force flexible premium non-guaranteed death benefit TOLI policies are illustrated to lapse prior to the insured’s life expectancy.
- Offer guidance and options: Inform your clients, attorneys, financial planners, and CPAs that a life settlement is often a viable solution for TOLI policies on the verge of lapse. Explain that in some cases, the trust makers may choose a life settlement for the underperforming policy and then use the proceeds from the life settlement toward replacement coverage with a better-performing product. Proceeds may also be used to fund long-term care and nursing home costs.
All wealth planning professionals whose clients have trust-owned life insurance should consider engaging an insurance professional with expertise in conducting regular policy reviews. Many life insurance policies are vulnerable to unanticipated risks, fluctuations in the stock and bond markets, and low interest rates. Once a trustee or insurance professional discovers that a trust-owned life insurance policy is at risk, they will want to consider all possible options – including a life settlement.
Jeff Hallman is a co-founder and managing partner at Asset Life Settlement LLC. He began his career in life settlements in 2001 and since then has negotiated transactions valued at about $2 billion in face value. He has been involved in case submission, underwriting, compliance, the institutional bidding process, life expectancy analyses and contract negotiation in the life settlement market. He can be reached at firstname.lastname@example.org or 888-335-4769 x1108.