1. Is life insurance
conducive for risk management?
Yes. Life
insurance is a risk transfer
mechanism
ideally suited for trust
ownership and risk management,
if the fiduciary understands
the risks to be identified
and managed. The economics
of a life insurance policy
are fairly straightforward
- payment of death benefit
proceeds is conditioned
upon the policy being in-force
at the time of death.
Product suitability is a
trustee’s critical
policy acceptance and management
determination. A trustee
can purchase a guaranteed
death benefit policy and
transfer premium adequacy
and policy performance risks
to the underwriting carrier
or purchase a non-guaranteed
death benefit policy and
retain contractual responsibility
to manage these risks. From
a risk identification and
management perspective, acceptance
of a non-guaranteed death
benefit policy requires defensible
premium adequacy evaluation
expertise. Also, a trustee
is well-advised to obtain
grantor confirmation of the
TOLI Investment Policy Statement
and to communicate policy
performance results to beneficiaries
annually.
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2. If a skilled trustee
accepts an insurance trust,
is the trustee accountable
to demonstrate a prudent TOLI-specific
risk identification and management
process?
Yes. The basic duty of a
fiduciary is to maximize
the probability of a favorable
outcome to the trust estate.
The Prudent Investor Rule
instructs a trustee to design
and actively carry out a
reasoned investment policy
that will fit within the
trust’s unique purposes
and the needs of the beneficiaries.
The
prudence of a fiduciary’s
conduct is evaluated against
a process standard, not a
performance standard. The
Prudent Investor Rule’s
General Requirements of Care
and Skill comments: “…if
the trustee possesses a degree
of skill greater than that
of an individual of ordinary
intelligence, the trustee
is liable for a loss that
results from failure to make
reasonably diligent use of
that skill. So also, if a
trustee, such as a corporate
trustee or professional fiduciary,
procured appointment as a
trustee by expressly or impliedly
representing that it possessed
greater skill than that of
an individual of ordinary
intelligence, or
if the trustee has or represents
that it
has special facilities for
investment management, the
trustee is liable for a loss
that results from failure
to make reasonably diligent
use of that skill or of those
specialty facilities (emphasis
added).”
A ‘best practices’ TOLI
risk management process should
avoid liability for: (1)
holding unsuitable life insurance
policies, (2) failing to
evaluate premium adequacy
of non-guaranteed policies,
(3) failing to take appropriate
action if trust objectives
change or policies are under-performing
their acceptance benchmark
values, and (4) failing to
annually provide beneficiaries
with a performance monitoring
report.
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3. What purpose
is served by a TOLI Investment
Policy Statement?
A TOLI Investment Policy
Statement (TIPS) serves an
essential roadmap purpose
for institutional and personal
trustees, especially family
member trustees who rely
upon professional advisors
and/or third-party experts
for all trust operation matters.
Properly used, TIPS should
safeguard the interests of
all insurance trust parties,
demonstrate a prudent risk
management process, and avoid
fiduciary breach of trust
exposure.
Based on the economic analysis
justifying creation of the
insurance trust and the trust
agreement, the TIPS sets
out the key issues for trustee
management, beneficiary understanding,
and professional advisor
awareness. It is a dynamic
document that can provide
guidance in the event that
trust objectives or grantor
funding capacity or tax laws
change. It clarifies annual
reporting and performance
monitoring expectations.
Finally, it facilitates credible
and cost-efficient delegation
of functions necessary for
informed decision-making.
In summary, TIPS demonstrates
a reasoned investment strategy
and prudent investment management
process.
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4. How is premium
adequacy evaluated for
indeterminate premium (universal
life, adjustable life,
and variable universal
life) non-guaranteed death
benefit policies?
Actuarial evaluation demonstrates
credible policy acceptance,
management, and restructure
determinations based on the
trustee’s premium adequacy
risk tolerance. If an in-force
TOLI policy is under-performing
its acceptance benchmark,
actuarial evaluation can
calculate the risk-appropriate
premium adjustment. If under-performance
poses a risk of lapse, actuarial
evaluation can calculate
the earliest possible lapse
age for comparison to insured
assumed life expectancy.
If a policy warrants restructure,
actuarial evaluation facilitates
credible analysis of restructure
options, including comparison
to a fixed premium, guaranteed
death benefit policy.
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5. Do carrier
illustrations for indeterminate
premium policies evaluate
premium adequacy risk?
No. The purpose
of an illustration is educational
to depict
how a policy works. Carrier
illustrations do not predict
future policy values, do
not evaluate premium adequacy,
and are not credible for
policy comparisons.Top
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6. Should
an insurance trust beneficiary
expect annual policy performance
communication?
Yes, especially
in today’s
UTC and failing TOLI policy
environment. The trustee
is managing the trust for
the benefit of the beneficiaries.
The frequency and form of
communication is usually
set out in the trust agreement
and clarified in the TOLI
Investment Policy Statement.
A beneficiary should receive
an annual performance report
confirming that the policy
(ies) is/are performing consistent
with the trust’s current
objectives and each policy’s
benchmark values. The premium
adequacy evaluation for indeterminate
premium policies should be
actuarially certified.Top of
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7. What are
the red flags suggesting
the need for third-party
expert assistance?
Approximately 25%
of in-force non-guaranteed
TOLI policies are predicted
to lapse prior to or within
five years of the insured’s
life expectancy. The following
red flags warrant third-party
expert assistance:
8. Should beneficiaries
obtain ‘second opinions’?
Yes, if necessary and appropriate
for the circumstances. A
trustee represents the interests
of the beneficiary and, hence,
a beneficiary should not
be reluctant in obtaining
a second opinion and/or clarifying
the trustee’s scope
of services. With any of
the red flags identified
above, a beneficiary should
seek a credible second opinion.
Life insurance is a sophisticated
risk transfer mechanism but
it is not self-managing.
Indeterminate premium non-guaranteed
policies have been the TOLI
policy-of-choice over the
past 25 years, yet few institutional
or personal trustees employ
defensible risk management
procedures and premium adequacy
evaluation capabilities.
As a result, the policy-of-choice
is now a candidate for lapse
or replacement when credible
premium adjustment may be
the more appropriate action.Top
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9. Is a TOLI
Investment Policy Statement
(TIPS) appropriate for
an irrevocable life insurance
trust?
Yes, especially if the trustee
is a family member, attorney
or accountant. An Investment
Policy Statement is basic
to any trust arrangement
as it documents the fiduciary’s
reasoned investment strategy,
prudent decision-making process,
and beneficiary communication
expectations. A TIPS should
provide trust administration
and policy management guidance
recognizing that some trustee
functions may necessitate
delegation to third-party
providers to appropriately
demonstrate “care,
skill, and caution”.Top
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10. Is a
trustee expected to take
corrective action if a
TOLI policy is unsuitable
for the trust’s objectives
and/or underperforming
its acceptance benchmark
values?
Yes. The Prudent Investor
Rule’s Duty to Conform
to Fiduciary Standards comments, “The
trustee’s duties apply
not only in making investments
but also in monitoring and
reviewing investments, which
is to be done in a manner that
is reasonable and appropriate
to the particular investments,
courses of action, and strategies
involved. The trustee’s
compliance with these fiduciary
standards is to be judged as
of the time the investment
decision in question was made,
not with the benefit of hindsight
or by taking account of developments
that occurred after the time
of a decision to make, retain,
or sell an investment. The
question of whether a breach
of trust has occurred turns
on the prudence of the trustee’s
conduct, not on the eventual
results of investment decisions.” Top
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11. Can a
fiduciary rely upon the
insurance agent to sell
a life insurance policy
suitable for the trust
objectives and to thereafter
monitor policy performances?
No. The responsibility
for policy acceptance, management,
and restructure decisions rests
solely with the trustee. An
insurance agent generally takes
direction from the fiduciary
at the time of policy purchase
and, unless otherwise affirmed,
does not have a duty to provide
service after policy delivery.
Agents retire and leave the
insurance business. Also, agents
are not able to provide policy
service to larger corporate
trustees that consolidate TOLI
monitoring in another regional
location.Top
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12. Can a
trustee rely upon an insurance
agent for credible policy
restructure recommendations?
No. An “agent” contractually
represents a life insurance
company so that a trustee should
request clarification of such
limitations. Depending on the
circumstances, a trustee should
consider a Request for Proposal
process involving multiple
agents and brokers. Also, some
carriers and broker dealers
restrict their representatives
from discussing ‘life
settlements’ so that,
again, clarification should
be requested and credible alternatives
pursued.Top
of Page
13. Do variable
policies require special
policy acceptance and performance
monitoring capabilities?
Yes. Acceptance of
a variable policy warrants
establishment
of an asset allocation strategy
and periodic investment subaccount
performance monitoring process
as set out in a TOLI Investment
Policy Statement. Further,
scheduled premiums should be
volatility-tested and actuarially
certified in documenting policy
sustainability to contract
maturity or insured life expectancy,
as a minimum. Carrier illustrations
do not assess premium adequacy,
and illustration methodology
does not include volatility
simulation.Top
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14. Do fixed premium guaranteed
death benefit policies warrant
annual monitoring?
Yes. A product suitability
determination is implicit
with each premium payment.
Trust objectives, tax legislation,
a grantor’s gifting
capacity, and life insurance
products frequently change.
Scheduled premiums can be
reduced if the insured receives
a more favorable risk classification.
A TOLI Investment Policy
Statement usually provides
for annual monitoring and
beneficiary review. An irrevocable
life insurance trust typically
requires an annual accounting
to trust beneficiaries. For
regulated trustees, an annual
review of all assets in each
trust account is required
by compliance regulations.
Further, it is not unusual
for a guaranteed death benefit
policy to have non-guaranteed
features that warrant monitoring
to assure policy acceptance
benchmark values are achieved.
Finally, non-guaranteed policies
now offer a “no lapse
guarantee” rider as
long as certain conditions
are met, and such conditions
should be annually confirmed.Top
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15. If a trustee ‘delegates’ (outsources)
the policy monitoring function
to a third-party vendor,
is the trustee responsible
for the scope of services
provided by the vendor?
Yes. The Duty to Delegate
is specific in setting out
the screening and performance
monitoring duties of the
trustee. A trustee should
avoid engagement of a limited
service illustration-based
vendor for a non-guaranteed
death benefit policy. Such
vendors (1) often develop
proprietary risk descriptions
and numeric grades that are
not explainable, much less
defensible, and (2) employ
policy comparison methodology “known” to
be inappropriate. Some vendors
profess to evaluate policy
suitability, yet they do
not have access to the trust
agreement, its TOLI Investment
Policy Statement, and the
trustee’s risk management
criteria.Top
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16. Is a trustee responsible
for evaluating costs?
Yes. A trustee has a duty
to only incur costs in investing
and managing trust assets
that are appropriate and
reasonable. As a result,
a trustee should request
confirmation of agent compensation
(placement and renewal commissions)
as well as projected policy
costs. Further, competitive
low load and non-commissionable
products are available and
should be considered. Cost
disclosure is especially
important in evaluating policy
restructure options for recommendation
to trust beneficiaries.Top
of Page
17. Should a successor
trustee undertake a credible
policy
evaluation before accepting
an insurance trust?
Yes. A successor trustee
may incur liability for failure
to correct the wrongful acts
of its predecessor. An exoneration
provision in the trust instrument
may not effectively insulate
the successor from such liability.
Therefore, prudent practice
dictates that a successor
trustee ensure that the predecessor
has complied with applicable
fiduciary standards.Top
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18. Does exculpatory language
safeguard a trustee?
Yes and No, depending upon
the circumstances. ‘Hold
harmless’ protection
remains a topical issue because
the trustee is the only party
to an irrevocable life insurance
trust with decision-making
responsibility and power.
Such protection would not
prevent trust beneficiaries
from alleging breach of trust.
Uniform Trust Code Section
1008 states: “A
term of a trust relieving
a trustee
of liability for breach of
trust is unenforceable to
the extent that it: (1) relieves
the trustee of liability
for breach of trust committed
in bad faith or with reckless
indifference to the purposes
of the trust or the interests
of the beneficiaries; or
(2) was inserted as the result
of an abuse by the trustee
of a fiduciary or confidential
relationship to the settlor.
An exculpatory term drafted
or caused to be drafted by
the trustee is invalid as
an abuse of a fiduciary or
confidential relationship
unless the trustee proves
that the exculpatory term
is fair under the circumstances
and that its existence and
contents were adequately
communicated to the settlor.”
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