Life insurance trusts are an important financial tool that helps families take control of estate taxes and plan their legacy. However, like any financial instrument, a trust-owned life insurance policy requires careful attention and maintenance to ensure its intended purpose over time. In this article, we’ll cover several of the potential challenges that could impact the security your client’s life insurance policy is designed to offer.
Lapsed Policies
One of the most significant risks of not being proactive with life insurance trust management is a policy lapse situation. This can happen if your client fails to pay the scheduled premiums on time or has suspended premium payments altogether. A lapsed policy means a loss of coverage, and the beneficiaries will not receive any benefits in the event of your grantor’s death. Policy performance and underlying costs can change over time, so it is essential to review the policy annually to ensure it is performing as intended.
Premium Increases
Certain life insurance policies may experience cost of insurance increases. If the policy faces an accelerated lapse or unaffordable premiums, it’s advisable to reassess its suitability for the Trust and the insured’s eligibility for new coverage. Regularly reviewing policies ensures they align with evolving circumstances and objectives.
Read more: Things Trustees Should Know as Life Insurance Rates Grow
Reduced Cash Value
In cases of permanent life insurance policies (whole life or universal life), there is a cash value component. If your client withdraws or if the policy’s cash value performance is poor, the cash value may not accumulate as expected. Regular communication and adjustments to the policy will help ensure that the permanent life insurance policy aligns with the client’s financial goals over time.
Outdated Beneficiary Information
Ensuring the recording of the beneficiary is correct at the insurance carrier is an important task when managing trust owned life insurance. Having an incorrect trust name or trustee recorded can lead to complications during the claims process. Ensure that your client’s policy reflects their current wishes, preventing potential disputes and delays in benefit distribution.
Overpayment and Unnecessary Coverage
As your client’s life circumstances change, so do their insurance needs. Neglecting to review and adjust your client’s coverage over time may result in overpaying for unnecessary coverage, or being underinsured when they need it the most. Regularly reassessing their financial situation and life goals will help them make informed decisions about their life insurance coverage.
In conclusion, life insurance trust management is not a “set it and forget it” financial strategy. Regularly monitoring and maintaining your client’s life insurance trust is essential to avoid negative outcomes that could impact the financial security of your client’s loved ones. Take the time to understand the terms of your client’s policy and stay informed about any changes.
If you are looking for guidance, ITM’s tolimonitor solution is the only fully outsourced service for trust-owned life insurance administration and policy management in the market. Trustees can expect to receive dedicated assistance from a team of professionals, including trust administrators, insurance experts, actuaries, and underwriters. To learn more about how to minimize your risk and costs associated with policy administration, contact one of our experts today.
