Managing trust-owned life insurance (TOLI) requires a comprehensive understanding of the policies held in the trust. One critical element that is often overlooked is the riders attached to these policies. Riders, or policy add-ons, can significantly impact a policy’s administration, benefits, and the trust’s overall financial planning.
For banks, trust companies, and their trust management teams, understanding and monitoring these riders is essential to ensuring the trust fulfills its purpose and meets the grantor’s intentions. Here’s an overview of common riders found in life insurance policies and what they mean for your trust management strategy.
Waiver of Premium Rider
This rider ensures that future premiums are waived if the insured becomes permanently disabled or unable to work due to injury or illness, typically before a specified age, often 65. This feature can be critical for policies with high premiums, especially when the insured is the primary breadwinner.
Key Considerations for Trust Management:
- Definition of Disability: Different insurers may define “totally disabled” differently. Ensure clarity on the terms outlined in the policy.
- Expiration Terms: Be aware of age limits for this benefit and plan for premium payments once the rider expires.
- Policyholder Communication: Regularly check the insured’s health status and financial situation to ensure the rider remains applicable.
Term Rider
A term rider allows for additional term life insurance to be added to the base policy’s death benefit, typically for a fixed period. This can increase the coverage without purchasing a separate policy.
Key Considerations for Trust Management:
- Temporary Coverage: Ensure the additional coverage aligns with the trust’s timeline and objectives.
- Conversion Options: Some term riders can be converted to permanent insurance. Review these terms as part of your policy evaluations.
- Whole Life Coverage with a Term Rider: Sensitive to any dividend changes and how premiums are paid. Ensure all understand premium requirements as often premiums may need to be increased in the future to maintain the full death benefit.
Accelerated Death Benefit (ADB) Rider
This rider allows the insured to access a portion of the policy’s death benefit while alive if diagnosed with a terminal illness. Typically, a percentage of the policy’s face value is advanced, with the remainder distributed upon death.
Key Considerations for Trust Management:
- Impact on Beneficiaries: The advanced benefit, plus any interest, is subtracted from the death benefit paid to beneficiaries.
- Cost Efficiency: ADB riders often come with little to no premium cost, making them an attractive option.
- Definitions Matter: Insurers’ definitions of “terminal illness” can vary. Ensure the trust’s policies cover the intended conditions.
Long-Term Care (LTC) Rider
This rider provides monthly payments or a cash benefit to cover long-term care expenses if the insured requires nursing home care or in-home assistance.
Key Considerations for Trust Management:
- Cost vs. Benefit: While LTC benefits reduce the policy’s death benefit, they can offer significant support for the insured during their lifetime.
- Alternative Coverage: Compare the rider’s benefits with standalone long-term care insurance to ensure the best value for the trust.
- Usage Flexibility: Review whether the benefit can be applied broadly to meet various long-term care needs.
Accidental Death Benefit (ADB) Rider
Also known as the “double indemnity rider,” this provision pays an additional death benefit—usually equal to the base policy amount—if the insured dies as a result of an accident.
Key Considerations for Trust Management:
- Limited Applicability: While not common in TOLI policies, the rider can provide significant value if accidental death coverage aligns with the trust’s needs.
- Cost Analysis: Evaluate whether the additional premium cost for this rider is justified given its limited scope.
Change of Plan Provision
This feature allows the insured to exchange the current policy for another offered by the same insurer. It’s particularly useful in scenarios like divorce, where a survivorship policy may need to be split into single-life policies.
Key Considerations for Trust Management:
- Eligibility Requirements: Ensure the policy’s terms allow for timely changes without compromising coverage.
- Alignment with Goals: Evaluate the new policy’s suitability for the trust’s objectives and beneficiaries’ needs.
Best Practices for Rider Management in TOLI Policies
- Policy Review: Obtain and thoroughly review the full policy contract, including all riders, to understand their specific terms and conditions.
- Annual Check-Ins: Regularly review each policy in the trust to ensure riders remain relevant and beneficial.
- Collaborative Approach: Work with insurance, legal, and financial professionals to assess the value of riders and make informed decisions.
- Proactive Communication: Maintain open lines of communication with the insured to monitor any changes that may impact the policy’s provisions.
Read More: Responsibilities of a TOLI Trustee: Navigating Fiduciary Duties
Conclusion
Riders can enhance the flexibility and functionality of TOLI policies, but they also require careful oversight to ensure they align with the trust’s goals. By understanding each rider and its implications, trust officers can better manage policies and deliver optimal outcomes for beneficiaries. If your team could benefit from outside expertise on complicated management issues such as understanding policy riders, request a consultation to learn more about our tolimonitor solution.
