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Insurance & Executive Benefits - Five Risks That a Professional Fiducairy Faces Now as a Trustee of an Insurance Trust and Our Five-Step Professional Process

Posted August 20, 2010

Five Risks That a Professional Fiducairy Faces Now as a Trustee of an Insurance Trust

A recent Prince & Associates study found that 83.5 percent of professional fiduciaries who reported acting as trustees said they did not have stated guidelines and procedures for overseeing life insurance owned by the trust. At the same time, the law is very specific about the duties and liabilities of trustees under the Uniform Prudent Investors Act (UPI).  The UPI places a trustee in a fiduciary role requiring that high standards of care and diligence be met on behalf of the trust beneficiaries. 

RISK 1: POLICY PERFORMANCE FALLS BELOW EXPECTATIONS
It is well known that virtually no permanent insurance policy performs exactly as illustrated in their original design.  Interest rates, dividend scales and investment returns have not been realized as originally projected and so policy benefits can be in jeopardy.  While mortality expenses have typically improved over time, death benefits can erode or even lapse prior to the death of the insured if the other moving pieces of a life insurance policy fall short of projections. 

RISK TWO: CARRIER FINANCIAL SOLVENCY
The recent volatility in the financial markets impacted many insurance companies, some of which are still struggling to get their balance sheets back to acceptable standards.  The rating agencies have lowered the ratings of virtually every insurance company. 

RISK THREE: LACK OF MONITORING
Many Trust Owned Life Insurance (TOLI) policies do not have a servicing agent or anyone monitoring the policy or insurance company that issued the policy.  In light of these factors, trustees have an increased responsibility to mitigate these risks.

RISK FOUR: POLICY OBSOLESENCE
Besides managing the performance of the existing TOLI portfolio of policies and monitoring the issuing insurance company, the trustee must demonstrate that due care has been taken to ensure the trust’s insurance portfolio provides the optimal benefit to the beneficiary.  This may include factors such as the premium amount, death benefit, guarantees, cash value and other areas inherent in a life insurance policy.  To add to these challenges, the insurance industry has continued to offer new products that can, in hindsight, appear to be more advantageous to beneficiaries at the time of a death.   

RISK FIVE: BENEFICIARY AND EXECUTOR LITIGATION
It may come as no surprise that litigation has increased in this area, with the potential for sizable judgments against trustees.  A recent case litigated in New York (discussed in an upcoming edition of this newsletter) demonstrates how a professional trustee can be held liable for monetary losses to the estate in certain situations.  We think that the methods of the past should be rebuilt to meet current needs. 

A PROACTIVE SOLUTION
We recommend a proactive solution that is a systematic process to acquiring life insurance within a trust that will help the trustee effectively discharge his duties or at least provide comfort to the trustee that the beneficiaries of a trust will receive the optimal solution based on the desires and planning of the trust grantor.  We assist trustees in employing a five-step process that draws upon our specialized expertise and tools in estate planning, investment theory, trust law, accounting, and risk management. Through this specialized system, the client is assured of a cogent and thorough process resulting in written documentation which sets forth:

• Clear objectives for the insurance, and
• Written quantifiable standards to assist the trustee in the selection, structure, maintenance and service of the policy over the grantor’s lifetime

Our Five-Step Professional Process

The Life Insurance Acquisition Process employs these five-steps:

1. THE LIFE INSURANCE DESIGN QUESTIONNAIRE – is an analytical assessment tool that helps the grantor clarify the purpose of the insurance held in trust and creates objective specifications for evaluating the insurance.
2. THE LIFE INSURANCE POLICY MANAGEMENT STATEMENT™ – gives clear direction to trustees on how they can optimize policies held in trust and clarifies in writing the duties of the trustee.
3. THE UNDERWRITING ADVOCACY PROCESS™ – is an optional service that assists trustees with helping clients obtain large amounts of insurance for the trust when the proposed insured has significant health impairments.
4. THE COMPREHENSIVE MARKET ANALYSIS™ – examines and compares various insurance products from several carriers using objective, quantifiable standards established by the client. This written report gives the trustee the assurance that the selection criteria are consistent with the process required of a fiduciary in accordance with the Uniform Prudent Investor Act.
5. THE POLICY ASSURANCE PROTOCOL™ – is a written service contract between the Trustee and the Estate Representative. It provides for an annual process to review and report on the policies held by the trust and assures that policies are managed in a manner consistent with the intent of the grantors and will produce the optimum benefit for the beneficiaries as outlined in The Life Insurance Policy Management Statement™.

If you would like additional information on our “Life Insurance Acquisition Process”, please contact one of our CGFS Wealth Management  insurance and executive benefits specialists.