TOLI Simplified

A Roadmap for Trustees and Advisors

With the passage of the Uniform Prudent Investor Act (UPIA) as a model act at the 1994 Annual Conference of Commissioners on Uniform State Law, the landscape on trust management changed. This Act has been approved by the vast majority of states and serves as a guideline for trustees of trusts, including Irrevocable Life Insurance Trusts (ILITs.) The level of liability that a trustee of an ILIT incurs is subject to state and local variations and other factors, but it is clear that a trustee who does not meet his or her fiduciary responsibility is subject to some level of liability. Although most trustees have no hand in the original decision to purchase a life insurance policy and no say in the drafting of the trust document, once the trust is established and the policy is in force, the trustee is required to maintain the viability of the policy.

What is TOLI Simplified?

TOLI Simplified is a holistic approach to TOLI trust and policy review that includes a review of the existing life insurance policyby an unbiased third party vendor, Insurance Trust Monitor (ITM), but centers on determining and reaffirming the trust goals and objectives. Once trust goals are reaffirmed, the suitability of the policy to reach those goals isestablished. Changes dealing with trust goals or investment instruments are documented to provide a written history of the decision-making process. The goals of TOLI Simplified are two-fold– mitigation of trustee liability and maximization of beneficiary benefits. See the TOLI Simplified Flowchart for more information on the TOLI Simplified process

Why is it so important to review the life insurance policy?

Life insurance policy is a complex financial instrument subject to the same types of economic fluctuations that affectmortgage interest rates or CD rates. Over the course of the last 20 years the interest rates on fixed life insurance policies have dropped continuously. For example, 20 years ago, the current interest rate on a Universal Life policy was almost 12%; the current rate now is just under 5%. Although Whole Life policies operate differently than Universal Life policies, the underlying investment returns will be similar. In Variable Life and Variable Universal Life policies, theinvestment returns are driven by “mutual fund clones” chosen by the policy owner,which are invested in a mix of stocks, bonds and cash equivalents. In some instances the anticipated returns in these policies have lagged also.The drag caused by the lower than expected returns in the life insurance policies purchased has caused actual cash values to be lower than the original illustrated values.All life insurance policies should be periodically reviewed to gauge actual policy performance against original expectations to make sure that the policy will reach the intended goals.

What happens if policy performance is less than expected?

If investment returns lag for an extended period of time in a permanent policy,a higher premium may need to be paid for the policy to reach the original goals. If returns continue to lag and no corrective measures are taken,the policy may lapse, often well before a death benefit is paid to the heirs.

How have the expense and mortality charges in a life insurance policy changed?

Over the course of the last 20 years both the expense and mortality costs of life insurance policies have dropped. Life insurance carriers are leaner,more efficient entities than they were a decade or two ago.But even more important in the pricing of life insurance products is the use of newer mortality tables that show a lower cost for coverage, as medical improvements and better health habits contribute to a longer life for most Americans.