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Life Insurance Trusts & Trustees—Five Reasons That It’s Time for an “Annual Review”

It is very typical for clients to have some or all of their life insurance held in a trust. The reasons are numerous (too many for this article) but suffice it to say that this ownership structure is utilized frequently and is part of sound estate planning. Each of these trusts must contain a trustee or trustees who have accepted the responsibility of overseeing the trust. A problem that often occurs is that most trustees do not understand the fiduciary responsibilities that come with being a trustee. They are typically unaware of the structure of the assets within the trust, especially when life insurance is one of the assets or the only trust asset. Recently published statistics illuminate some major issues regarding trust-owned life insurance:

1.  81% of all trustees state that they have had little or no guidance from the grantor about how to treat or review the performance of the life insurance policies in the trust.

2.  69% of trustees have not reviewed the policies in the trust in the past five years.

This could lead to major problems and potential litigation as trustees have a fiduciary duty under the Uniform Prudent Investor Act (UPIA) to review trust-owned life insurance and ensure that these policies are performing adequately compared to similar assets in the class (i.e., other policies). Studies show that over 50% of trust-owned policies are underperforming comparable life insurance contracts.

The following are five reasons that now is a great time for an “insurance audit” of trust-owned life insurance:

1.  A trustee’s failure to review and monitor trust-owned assets, such as life insurance, violates UPIA statutes. This could very easily lead to litigation, from the beneficiaries of the trust, should the trust-owned policy(ies) lapse or not pay the stated benefit.

2.  Most trustees, even accountants, attorneys and other financial professionals are not familiar with life insurance assets. A life insurance review (audit) performed by an expert, utilizing third-party comparison data, can help identify policies that are not performing as expected. The trustee can perform their fiduciary duty and address the issue by outsourcing this review to an expert.

3.  Many trust-owned policies were sold with “guaranteed” death benefits. These are seemingly simple policies and need little to no supervision. If you read that last sentence and agree, then you’re wrong. The “guarantees” on these policies can disappear very quickly if premiums are skipped, paid late or loans are made from the policies. Many times the “problem” will not come to light for many years and at that point the insured could be much older and may have health issues. In most cases, this situation can become quite messy very quickly and almost always lead to litigation. Guaranteed policies must be monitored to make sure that these guarantees remain in place.

4.  “Variable” and “Indexed” Universal Life Policies have values tied to stock market performance. Whether they perform better or worse, these policies never perform as illustrated. This is true because when you think about it, how could they? There are so many variables in play with these policies (rates of return, caps, floors, charges, etc.) that the odds of any policy performing exactly as illustrated are virtually nonexistent. It is critical that the performance of these policies are reviewed and monitored consistently to make sure that they are performing adequately.

5.  Finally, term insurance must be reviewed as well. Term insurance rates have dropped and many older policies are very expensive relative to new policies now available. In addition, many policies are nearing the end of their guarantee periods. When the guarantee period ends, the premiums, in most cases, will become prohibitively expensive. It is essential that these policies be reviewed before the end of the guarantee period.

The keys to the adequacy of any policy review are the quality of the professional performing the review and the “benchmarks” they are using to review the policies. One way is to utilize “third party” data to rate a policy from one to five stars based on a myriad of variables. This system isn’t inexpensive but provides the best possible “unbiased” data for clients and their advisors.


About Ron Roth

Ron Roth
Ron, a graduate of George Washington University (B.A. 1988, Political Science), has a life insurance practice and is the Director of Marketing & Producer Relations at M&M Brokerage Services Inc. in New York City. At M&M (an affiliate of National Financial Partners – NYSE:NFP), he markets products and services offered to top life insurance and financial services professionals across the country. Ron is a noted author whose articles can be found in many publications. In 2008, he published his first book, Invest In Your Life: Why Wall Street Wants You, which challenges the concept of Stranger Owned Life Insurance (STOLI) and shows how life insurance death benefits can be used as an asset class by individual investors. He can be contacted at 516-458-6545 or

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