Trustees of a trust that owns life insurance are generally under a fiduciary duty to review and manage trust assets prudently for the benefit of the beneficiaries. The present volatility of the marketplace makes trustees even more vulnerable to scrutiny for their actions (or inactions) regarding trust assets. Further, under the Uniform Prudent Investor Act (which is the law in most states), trustees must establish and follow an appropriate process for determining the suitability of trust-owned life insurance policies and for managing such policies in response to changing market conditions. Note that having and following a thoughtful process can be even more important than the actual performance of the trust assets. Proper documentation of the regular monitoring of the policies should put a trustee in a very good position should he or she ever have to defend what was decided (or decided against). The advice of a qualified insurance professional is essential to this process.
And, regardless of whether or not life insurance is owned by an insurance trust, the life insurance needs of the insured’s family may have changed over time based on, for example, a change in marital status, a change in the needs of the spouse and/or children, a change in the health of the insured, or the recent significant changes in the gift, estate and generation-skipping tax rules. The financial picture of the insured may have changed, so that additional or less insurance may make sense. In certain circumstances, it may be possible and make sense to purchase a new, more favorable insurance policy with the accumulated cash value of an existing policy(ies) through a tax-free exchange.
In any case, it is not enough to simply rely on the analysis that was done when the policies were acquired. It is important to review an insurance policy as an owner would any other investment.
While it is probably not necessary to conduct this review or life insurance “audit” of an insurance policy every year, one should certainly consider such a review every few years, inclusive of the following: (1) the policy itself, obtaining an updated in-force illustration to see if the premiums are adequate to sustain the policy; (2) the insured’s health or other factors that might impact pricing in a favorable way (e.g., the insured stops smoking); (3) whether the policy is still competitively priced compared to other products available in the marketplace; and (4) the financial strength of the company that issued the policy.
The good news is that this review process can sometimes produce a substantial increase in trust death benefits or reduced premium requirements for the same trust death benefit. Further, it may give an insured confirmation that the policy value outweighs the expenses, and, perhaps more importantly, it provides a trustee with the peace of mind that he or she is actively managing the life insurance policies for the benefit of the trust beneficiaries.
