Managing trust-owned life insurance policies is complex, especially when clients suspend premium payments. Around 40% of the policies we review annually are inadequately funded, resulting in premature lapses or reduced death benefits. While some factors causing these lapses are beyond the trustee’s control, such as rising insurance costs or reduced interest crediting rates, many are due to clients suspending premium payments.
In this blog post, we’ll discuss the challenges trustees face with suspended premiums on Whole Life policies and strategies to protect the trust beneficiaries’ interests.
Updating Suitability
When dealing with suspended premiums, trustees must reevaluate the trust’s needs and policy suitability. This includes assessing the insured’s health, the trust’s risk tolerance, and its objectives. However, the decision-making process extends beyond keeping or terminating the policy as trustees must explore additional options.
Exploring Options for Suspended Premiums in Whole Life Policies:
Whole life policies, unlike universal life policies, require premium payments each year unless explicitly paid up. There are, however, several ways premiums can be paid with a whole life policy’s internal value if out-pocket premium contributions are suspended.
Utilize Dividends
Whole life policies owned by trusts often earn dividends that can be used to purchase more insurance (paid-up additions) or reduce premium amounts due. Robust dividends from a policy in force for enough time may cover the full premium. Alternatively, previously acquired paid-up additions may be surrendered to pay a part, or all, of the premium. In addition, the trustee must be cautious about any dividend changes if a term rider is present, as this rider could be terminated should the dividend option be changed to reduce the premium.
Policy Loans
Policy loans offer a way to pay premiums by borrowing against the policy’s cash value, reducing both available cash value and the policy’s death benefit. While effective for suspending out-of-pocket contributions, early or excessive use can harm the policy’s death benefit. To avoid surpassing the policy’s cash value and potential surrender, unsustainable out-of-pocket contributions may be needed, with possible taxable consequences upon policy termination despite the trust holding no value.
Convert to Paid-Up Status
Most whole life policies can be converted to a paid-up status, albeit with a reduced death benefit. Additionally, some whole life policies contain a term component of insurance that if reduced or eliminated may make full premium payments through dividends more feasible to achieve. With all the potential moving parts of a whole life policy, the trustee must work with the insurance carrier to determine what methods are possible to best maintain the policy if no further out-of-pocket contributions are made.
Learn More: Managing Suspended Premiums in UL and Variable UL Policies
Conclusion
The best approach to managing a policy with suspended premiums depends on the trust’s needs and the available options for the specific policy. Trustees should carefully evaluate all available alternatives and work closely with clients to find the most suitable solution.
Our team of life insurance experts behind our tolimonitor solution can help you navigate the complexities of managing trust-owned life insurance, including finding the best strategy when clients suspend premium payments. Request a consultation today to learn how we work with banks and trust companies to reduce the risk and cost of administering ILITs.
