A TOLI trustee we work with received a request for a TOLI Policy Remediation from a grantor tired of gifting to pay premiums on his portfolio of whole life policies. His agent suggested that the three policies be replaced with one policy with a reduced death benefit. The existing portfolio totaled $5.7 million of coverage. The agent proposed transferring the $2.1 million of cash value into a $3 million equity index universal life (EIUL) policy. Assuming a reasonable crediting rate assumption and current charges, the new policy would carry until age 92, which was past the life expectancy of the grantor/insured.
While it is true that the new policy would need no additional funding, and assuming conservative crediting assumptions would carry the policy past the expected lifespan of the insured, no review was ever done on the existing policy options. After contacting the carrier, we found that the existing policy death benefit could be reduced to $3.9 million by requesting a paid-up policy which would contractually guarantee the death benefit until maturity when the policy would endow (cash value equals death benefit).
The Trustee choices in this case were:
- Guaranteed $3.9 million of coverage with increasing cash value.
- Non-guaranteed $3 million of coverage with decreasing cash value.
While it seems easy to see the prudent decision is number 1, it was not easy to see at the time. Why? Because the trustee did not have all the information or the requisite skill to gather and analyze all the information.
TOLI Policy Remediation
The above case study is an example of TOLI Policy Remediation. While this mostly occurs when a cash value investment is lower than expected, or when the cost of insurance (COI) increases, it can also happen when the value of an unneeded policy is maximized, even when the value simply stops.
This becomes crucial when TOLI trustees consider how many clients, such as the one above, do not consider the options for maximizing value. While the simple definition of TOLI Policy Remediation involves a simple correction, this often elongates into changes in client goals, or necessitated changes from market performance.
The example above showed a type of remediation policy in which the TOLI trustee suggested a policy replacement, due to the grantor’s decreased desire to pay premiums. The TOLI trustee did not consider the variety of options at their disposal-one of which was the paid-up policy that guaranteed a $3.9 million death benefit. This demonstrates the need for a thorough TOLI Policy Remediation process.
By categorizing various kinds of remediation, TOLI Trustees can better understand which specific options to take. Is a trustee trying to implement a new policy? Is a policy lapse imminent and in need of correction? Has a death benefit decrease reared it’s head? These are all options that a TOLI Trustee needs to lay out before they can properly diagnose the specific TOLI Policy Remediation need.
The TOLI Handbook
We cite 6 case studies in the TOLI Handbook, each with its challenges, each representing potential liability to the TOLI trustee.
We guide you through these situations in the TOLI Handbook, a free 155-page PDF we believe represents the best single source of information available for managing TOLI trusts and life insurance.
ITM provides a comprehensive ILIT administration solution to help trustees reduce the cost of administering trusts and managing policies that includes policy remediation from our remediation team. To learn more about how tolimonitor ensures that premiums are paid and that policy is in good standing, request a consultation here.
For a FREE copy, please go to www.TOLIHandbook.com.
