TOLI, which stands for Trust Owned Life Insurance, focuses on the fiduciary duties of the trustee of an irrevocable life insurance trust and how those duties may or may not have been met. At its core, TOLI asks the simple question, “was the trustee a good steward of the insurance policy or policies entrusted to them?”
In a prior white paper, I outline how many life insurance policies underperform original projections and often terminate unexpectedly. Of course, fiduciaries must adhere to an elevated standard and, given the current economic environment, their attention is strongly encouraged. Unfortunately, many fiduciaries are asleep at the switch. Industry research indicates over 65% of all active or “inforce” policies have not been reviewed in the past five years and, of those, 20% are likely to lapse in the next three to seven years. Additional research finds that over 80% of insurance trust fiduciaries have no written process, guidelines, or procedures for handling TOLI policies. With ultra-low interest rates and a chaotic stock market, even policies labeled as “permanent” are at risk.
TOLI embraces the same policy review guidelines used for non-trust owned policies; however, the stakes are often exponentially higher with TOLI policies because they have larger benefits than average policies. TOLI examines if the trustee followed a prudent process in applying generally accepted fiduciary principles in the proper management of the life insurance policy or policies owned by the trust. Now this all may seem like common sense, but I would tell you my own experience shows most insurance fiduciaries are way behind the curve on this matter.
The Uniform Prudent Investor Act (“UPIA”) was officially adopted in 1992 by the American Law Institute's Third Restatement of Trusts. This was a welcomed and needed change, but the new procedures were only initially applied to investment portfolios - life insurance policy oversight came later, if at all. Life insurance policies can be complex and coupled with a lack of oversight creates a recipe for disaster.
Most life insurance policies are NOT a “set it and forget it” transaction. Trustees can’t simply put their head in the sand or periodically conduct a google search of the insurance company's financial health and call it good. To meet the threshold for a prudent process requires a more proactive approach. While there are currently a few third-party firms for hire that will perform a one-time or ongoing annual policy review for a fee, these reviews often omit a “mark-to-market” coverage analysis. Insurance markets are fluid and this omission may be a critical oversight.
Finally, TOLI historically focused on life insurance policy oversight, but there is creep into the areas of long-term care policy oversight and life settlement options. The long-term care market has changed substantially in recent years and life settlements can be a credible restructuring alternative for life policies in jeopardy of lapsing due to underfunding.
