Remediation is often the weak link for TOLI trustees as many trust companies and banks do not have the requisite resources or expertise to analyze life insurance policy options. This can lead to potential liability if making policy changes without understanding all policy options available.
Often the decisions to be made are not black and white, they are grey. The management of life insurance is unlike any other financial instrument since the timing of the benefit paid is unknown, though assumptions on life expectancy can be made.
It is important as a TOLI trustee to have a complete file for every decision made on a policy with an analysis that shows all options, as well as the reasoning behind the decisions made. According to the UPIA, decisions made by a trustee should be based on the best facts and circumstance available at the time, but if a well-judged decision is made, the trustee who follows a prudent process will not be held responsible for an undesirable outcome. One should be able to demonstrate that you gathered and reviewed all the facts and explored all the choices to document a prudent process.
Reasons for Policy Remediation
There are many reasons policies land in remediation:
Misunderstood Policy: Policies taken on without a clear understanding of policy funding needs or other policy details.
Policy Loans: Policies with significant loans that negatively impact the policy.
Cost of Insurance (COI) Increases: A rather recent issue, COI increases can double or triple the carrying costs on a policy overnight.
Premature Lapse: Because of policy performance and/or inadequate funding, policies may be projected to lapse prior to maturity or life expectancy.
Changing Trust Goals: Modifications in tax laws or changes in the personal or financial situation of the grantor can alter the death benefit need.
Changing Trust Contributions: Contributions to the trust available to pay policy premium may be reduced or stopped all together.
Policy remediation is one of the most important tasks of a TOLI trustee. By categorizing various kinds of remediation, TOLI trustees can better understand which specific options to take. 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 policy remediation need. Making a prudent remediation decision and documenting the reasons for, and the processes around, that decision will help mitigate liability. Remember, the policy outcome cannot be completely controlled but the process can.
Creating a successful remediation process requires a team of dedicated insurance experts to execute it. As TOLI administration experts, ITM has a team behind our tolimonitor ILIT administration solution with the necessary expertise. To learn more about how tolimonitor ensures that premiums are paid, and that policy is in good standing, request a consultation today!
