Each year at this time, I receive premium notices for life insurance for one of my clients who asked me to serve as his trustee for his insurance trust (ILIT). It is certainly an honor to be selected as trustee, but with that honor comes a very significant responsibility of doing my homework to make sure that the only asset of the trust, the life insurance, remains viable.
This reminds me to remind all of you who are also trustees of ILITs to consider the following, which is taken from a post that I did earlier this year:
Irrevocable life insurance trusts (“ILITs”) are popular estate planning tools used to shelter life insurance proceeds from estate taxes. While the insured is alive, generally the only asset owned by an ILIT is a life insurance policy. However, trustees of an ILIT have a duty to make sure that the policy is a prudent investment and may be liable to the beneficiaries if it is not.
So, a trustee of an ILIT should ask the following questions (at least annually):
- What is the insurance company’s present financial strength? Life insurance companies are rated for financial strength and stability by ratings services such as Moody’s A.M. Best and Standard & Poors.
- Is the policy performing as illustrated? Policy illustrations make certain assumptions for rates of return and the like. If the initial illustrations used interest rates that were not attained, then the policy could require additional premium payments beyond those anticipated to avoid lapsing.
- Is the policy satisfying current needs? Policies purchased years ago usually satisfied then current needs. Changes in the tax law and circumstances of the trust grantor and beneficiaries may warrant revisiting the type and amount of insurance coverage to address current needs.
- Can a more competitive policy be purchased? With longer life expectancies and lower mortality costs, a new life insurance policy, despite the fact that the insured may be years older, could result in a significant premium reduction without sacrificing the death benefit.
It looks like I will be busy answering these questions so that my client’s family won’t have to worry about his insurance when the time comes for me to collect it on their behalf!
Tags: Attorney, Estate Planning, estate tax, Florida, insurance trust, Joshua T. Keleske, Lawyer, life insurance, Tampa, Trust, Trust Administration
You touched on a lot of good points. Policy types that fall within the “Danger Zone” require that they be actively managed through its entire life – similar to stock and bond portfolios.
We believe a few other issues should be reviewed periodically (i’ll try to keep it brief):
Life Expectancy – Should your client’s “LE” be actuarially assessed? For instance, if there was an 80% chance your client will be deceased 5 years before average LE (i.e. 50% of given population will die by this age) would you change your funding strategy? What if your client’s personalized LE projected that they had a 80% chance of surviving to age 92?
Policy Standards – are your client’s projected expenses, mortality, and investment return at outset in accordance with industry averages? Is your policy a lemon compared to others?
Policy Expense Deviation – Policy expense deviations are the percentage difference between your insurance company’s illustrated and inferred projections of non guaranteed costs of mortality and expenses, and our proprietary policy standard pricing model. Deviations of greater than 10% should throw up some red flags. Can you rely on the insurance company’s inforce projections enough to make decisions?
I run a blog called the Trustee Advisor. Take a look at what policies fall into the danger zone. Check it out at http://lipm.wordpress.com/
[...] http://www.trustedcounselors.com/blog/2009/insurance-trust-review/ [...]
Do you think the Class Act ( long term care insurance ) portion of health reform will remain in the Senate bill, or has it already been made a part of it? SOrry if I am a little off topic here.
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