This article explores many of the common misperceptions
about trust owned life insurance – plus a process for you to add significant value
for your clients by incorporating policy reviews of trust owned life insurance.

Although trust owned life insurance (TOLI) is a common planning vehicle for
high net worth individuals and families, relatively few TOLI policies ever
meet their initial projections. Industry studies reveal that TOLI portfolios
rarely receive the required vigilant fiduciary oversight routinely associated
with other assets held in trust, such as equities, real estate, etc.

Seven Common Client Misconceptions – and Facts – about Life Insurance

   
Misconception #1: Unlike other assets, life insurance policies do not need management and regular review to avoid risk and optimize performance.
Fact: Policy performance can change dramatically over time. Without regular
review by an insurance expert, policies – especially older ones – can pose
very significant risk or not achieve their original goals.

Misconception #2:  If the client pays premiums according to the
schedule in the original insurance illustration, the policy will pay at death.
Fact: Even with regular payment of premiums projected from the original policy
illustration, policies can fail if not monitored properly.

Misconception #3: If the policy was in jeopardy, the carrier would
notify the client in advance.
Fact: Carriers will not necessarily provide
advance notice of policy problems to trustee owners of TOLI policies.

Misconception #4: If one carrier has turned down the client for insurance,
it is not possible to get adequate coverage from another carrier.
Fact: The competitive nature of the insurance industry means that it is
often possible to secure appropriate coverage from a highly rated carrier
even if another carrier has already rejected the client.

Misconception #5:  Premiums will remain level for the life of the
policy regardless of economic conditions or interest rates.
Fact: Premiums are always a reflection of the insurance carrier’s
cost of providing coverage, current interest rates, and other economic
conditions. Any of these changing factors can cause the premium rates to change.

Misconception #6: Policies purchased many years ago are cheaper
than current policies because the insured is older.
Fact: Improved mortality rates as well as better underwriting and
policy features created by industry competition often produce
less expensive coverage on new policies (or increased coverage for the same premium).

Misconception #7: If the client no longer needs the
insurance coverage provided by a policy, the only option
is to surrender it to the carrier for relatively little value.
Fact: A variety of alternatives, including improved life settlement
opportunities, make it possible to gain substantially greater value
than that provided by cash surrender to the carrier.

What is a Trust Owned Life Insurance Review?
A TOLI review is an objective review of the policies owned by a
trust to ensure that those policies perform as the client intended.
A TOLI review also examines options for reducing premiums or selling
policies that the client may no longer need because of changed
circumstances, increased exemptions, etc.

Why should advisors tell their clients about TOLI review?
Advising your clients of a TOLI review will give immediate
value during your interview. Few clients get excited about
spending time or money on estate planning.  By incorporating
a "Life Insurance Policy Review," the estate planning advisor
can now create opportunities for immediate cash savings or
profits for clients in addition to the standard planning
and "projected estate tax savings at death."

Planning Tip:
A TOLI policy review not only benefits the client,
it also makes good business sense for the advisor. Such a review
generates good will, gives the client a real appreciation of the
advisor’s concern for the client, and frequently generates more
than enough savings to pay for the advisor’s fees.

Why do the clients like the idea of a TOLI Review?
Nobody likes paying premiums and very few clients understand
life insurance. When their advisor suggests an objective "audit"
of insurance policies to determine if they could reduce their
premiums, clients are receptive.  They appreciate that you are
trying to help them and that you are not selling them anything.

Why are trust companies rushing to implement TOLI Reviews?
Nearly every week banking journals publish articles on the
fiduciary issues related to Trust Owned Life Insurance as
institutional trust companies develop "best practices" to
manage and monitor trust owned policies. Over 40% of institutionally
trusteed policies reviewed have serious deficiencies or problems.
Few institutional trustees have the necessary level of insurance
expertise for proper policy review. Trust companies fear a lawsuit
for improper management of their trust owned insurance policies.

Planning Tip:
Your clients need their advisors’ guidance to
better understand both the risks and the improved opportunities
from TOLI. The potential risk for your clients is substantial.
Policy grantors and trustees need to recognize that life insurance
is an asset that must be periodically reviewed by an independent
expert to avoid risk and to optimize asset performance.

What are the results of reviewing Trust Owned Life Insurance policies?

Facts about TOLI policy reviews – there is a high likelihood that:

1. The TOLI policy represents a considerable percentage of the client’s total estate.
2. The TOLI policy has not been reviewed or managed since purchase.
3. The TOLI policy is not performing as originally projected.
4. The client must pay additional (unexpected) premiums before death.
5. The client can get more insurance for the same premium (despite being older).
6. The client can get the same insurance coverage for less premium outlay.
7. The trustee has never reviewed the policy.
8. The agent who sold the policy is no longer in touch with the client.
9. The insurance coverage is no longer appropriate for the client.
10. The policy provisions and guarantees are obsolete.
11. The client and the trustee do not really understand the impact of
    falling interest rates since policy inception.

Planning Tip:
The average non-institutional trustee (for example, brother-in-law, friend, etc.)
is even less informed than is an institutional trustee – and even less likely to audit policy performance.
Therefore, the insurance risk is even greater with non-institutional trustees,
but they may be less likely to act upon that risk.

What features are important in a reliable provider of TOLI review service?

• Insurance expertise
• Independence
• Objective advice

Planning Tip:
Look for a turnkey TOLI review service that can offer not
only an expert policy review and a clear comparison of all policy solutions,
but also a cost-effective, comprehensive program to manage client policies.

Conclusion

Offering your clients an objective TOLI review provides them with
significant value added and peace of mind as to their wealth
planning; specifically, it increases the likelihood that
their planning will achieve their stated objectives. Consider
working with an advisor who can perform an objective TOLI
review to accomplish this much needed – and often overlooked – analysis.