What Financial Professionals Should Know About Trust-Owned Life Insurance (TOLI) and Life Settlements

September 2, 2014 

Trust-owned life insurance is often considered the cornerstone of an estate plan. It enables the trust to provide a cash inheritance to survivors, to cover estate taxes, liquidate debt, or create a legacy through charitable gifts. But because of its long-term investment horizon to maturity, a trust-owned life insurance policy is often overlooked by those monitoring or managing the overall trust.

It is important that trust-owned insurance policies be reviewed regularly to determine if they are at risk of lapsing – especially in light of the current low-interest rate environment and recent action by Congress that set the estate tax exemption at $5 million.

According to an analysis of life settlements conducted several years ago, approximately 40 percent of life insurance policies sold in the secondary market involved trust-owned life insurance. However, given the recent developments explained above, it is likely the percentage of TOLI policies sold in the secondary market will increase substantially in the future.

Insurance advisors have an opportunity to play a key role in salvaging TOLI policies on the verge of lapse. In cases where the policy is at risk of lapse without a substantial infusion of cash to keep it in force, the reviewing professional may want to recommend to the client that a life settlement is a prudent course of action to explore.

Talking Points for Insurance Advisors

Below are four talking points that agents should have “top-of-mind” as they discuss this topic with clients, trustees, bank trust departments, and the children of elderly parents managing their trusts looking for estate planning options:

  1. Provide historical background information: Explain to your clients and referral sources that many older universal life policies were purchased “back in the day” when interest rates were substantially higher and the anticipated dividends were intended to fund future premium payments. Given the current interest rate environment, many of these TOLI policies may be on the verge of lapse.
  2. Become a trusted resource to other professionals: Grantors often appoint trustees who are family members or friends with no formal training as it relates to reviewing policy illustrations or managing investments. Agents should consider inviting an estate planning attorney or CPA to lunch to discuss the challenges of having their clients appoint family members, as trustees, when it involves overseeing trust-owned life insurance.
  3. Reference Statistics: According to an article published earlier this year by LifeHealthPro, it is estimated that 90 percent of in-force trust-owned life insurance policies are administered by amateur trustees. And furthermore, approximately 38 percent of in-force flexible premium non-guaranteed death benefit TOLI policies are illustrated to lapse prior to the insured’s life expectancy.
  4. Offer guidance and options. Inform your clients, attorneys, and CPAs that a life settlement is often a viable solution for TOLI policies on the verge of lapse. Explain that in some cases, the trust makers may choose a life settlement for the underperforming policy and then use the proceeds from the life settlement toward replacement coverage with a better-performing product. Or that proceeds can be used towards rising long term care and nursing home costs.

In conclusion, all wealth planning professionals whose clients have trust-owned life insurance should consider engaging an insurance professional with expertise in conducting regular policy reviews. Many life insurance policies are vulnerable to unanticipated risks, fluctuations in the stock and bond markets, and low interest rates. Once a trustee or insurance professional discovers that a trust-owned life insurance policy is at risk, they will want to consider all possible options – including a life settlement.

If you have a possible life settlement case that you would like to discuss, please contact either Jeff Hallman or Scott Thomas from Asset Life Settlements at 888-335-4769.