Navigating Life Insurance Sales Regulations as a TOLI Trustee

As a TOLI trustee, you have a fiduciary responsibility to ensure that every transaction - either a new policy sale or replacement is not only suitable for your client, but also in your client’s best interest.

The DOL fiduciary rule (June 2018) has set a higher standard for advisors dealing with annuities and retirement investments. Life insurance sales in the trust owned life insurance (TOLI) market have yet to be subjected to similar federal regulations.

Life Insurance Sales Regulations in New York

At a state level, New York state stands out as a pioneer in this arena. They implemented the most robust law (August 2019) concerning life insurance and annuity sales. Exemptions exist for specific transactions like corporate-owned (COLI) or bank-owned (BOLI) life insurance and sales in the secondary market. Yet traditional life insurance sales to consumers, particularly in TOLI, come under strict guidelines.

The law requires any life insurance salesperson to “act in the best interest of the consumer”. Any product recommendation must “be based on an evaluation of the relevant suitability information of the consumer”. It must also reflect “the care, skill, prudence, and diligence that a prudent person acting in a like capacity… would use under the circumstances.” In making any recommendation “only the interests of the consumer” can be considered. Though no limitations are placed on compensation, the law requires that “compensation or other incentives permitted” should not “influence the recommendation.”

The Standards for TOLI Trustees

Unlike life insurance salespeople who often only need to meet suitability requirements, TOLI trustees are held to a higher fiduciary duty. This ensures that every transaction, including policy replacements, is not only suitable but also in the best interest of their clients. This difference in requirements has created issues that we’ve seen first hand at ITM.

For example, before becoming a client of our tolimonitor solution, one trustee had to pay a significant amount to make a grantor whole for a policy replacement. This replacement occurred two years prior on the recommendation of a local life insurance agent. The replacement put the trust in a worse position than it was in with the previous policy.

Solutions From the TOLI Handbook

Policy replacements have become an area of increased liability for trustees. In the TOLI Handbook, available here as a free PDF download, we write about two replacement transactions. Either could have placed the trustee in hot water – and possibly a courtroom. One replacement, pushed hard by an agent who was also a good friend of the grantor, would have replaced an existing policy in the trust. The suggestion contained a demonstrable costs four times as high over the lifetime of the policy, clearly violating Section 7 of the Uniform Prudent Investor Act (UPIA). In another replacement case, an agent advised a TOLI trustee to replace a portfolio of whole life contracts with a new equity index universal life policy. This would have provided the trust with fewer guarantees and a death benefit worth $900 thousand less. The trustee has a duty to investigate any transaction, including all the options for the existing policy. In this case, the agent never reviewed any.

A few other states have considered creating similar regulations to the state of New York. This includes several insurance organizations. For now, the responsibility lies with TOLI trustees to thoroughly investigate every transaction. Trustees must consider all options for existing policies and ensuring that any recommendations align with their clients’ best interests. Until further regulations emerge, trustees must remember that they sit on the opposite side of the table from most life insurance salespeople. Thus, they must act accordingly to safeguard their clients’ financial well-being.

Consult TOLImonitor

Our comprehensive trust-owned life insurance solution TOLImonitor reduces the cost and risks of adminstering trusts and managing policies while delivering superior results for grantors and beneficiaries. Request a consultation to learn how our team of trust administrators, life insurance experts, and underwriters can service your trusts for you.

Leave a Reply

Stay up to date on industry news, best practices, and ITM solutions for trust owned life insurance, will file tracking, and business valuations. Subscribe to our blog to get bi-weekly emails when new posts are published.

Newsletter Sign-Up

"*" indicates required fields


This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

This field is for validation purposes and should be left unchanged.

%d bloggers like this: