Not all life insurance policies are created equal — and neither should be the oversight applied to them.
One of the most common missteps in trust-owned life insurance administration is treating every policy in a trust portfolio with the same level of review intensity. An annual checkbox review may satisfy the basic regulatory requirement, but it doesn’t account for the fact that different policy designs carry dramatically different risk profiles. The type of policy sitting inside a trust should be one of the primary drivers of how frequently it’s reviewed.
Here’s a breakdown of what a more thoughtful approach looks like in practice for each major policy type.
Term Insurance: Watch the Clock
Term policies are the simplest to understand but can become the source of significant liability if not actively monitored for time-sensitive events.
Most term policies sold today carry a level premium that is guaranteed for a specified period, often 20 or 30 years, after which the cost to continue coverage can increase dramatically. More critically, term policies typically include a conversion provision that allows the insured to convert to a permanent policy at their original underwriting class, without new evidence of insurability. This is one of the most valuable features in any TOLI portfolio, particularly for an insured whose health has changed. Miss that conversion window, and you may have exposed the trust — and yourself — to serious liability.
In practice, missing the conversion period is among the most serious mistakes a trustee can make — second only to allowing the policy to lapse altogether. The conversion opportunity is often limited to a narrow period — for example, the first 10 policy years or until a specific age — and requires advance documentation and communication with the grantor.
Oversight implication: Term policies don’t require complex financial analysis, but they demand calendar-driven vigilance. Conversion deadlines should be flagged well in advance, grantors should receive written notification of their options, and files should be documented accordingly. The risk here is administrative, not actuarial.
Whole Life: Steady, But Not Static
Whole life insurance offers the most predictable structure of any permanent policy type — guaranteed death benefit, guaranteed cash value, and fixed premiums. For that reason, it’s tempting to treat whole life policies as “set and forget.” That’s a mistake.
Dividends on participating whole life policies are not guaranteed. They fluctuate based on the carrier’s investment performance, mortality experience, and expenses. Over the past several decades, dividend interest rates have declined steadily, and many policies have not performed as originally illustrated. For policies that use dividends to offset premiums or fund paid-up additions, a sustained decline in dividends can quietly erode the financial foundation of the policy.
Policies with blended structures — where a term rider is layered inside the whole life base — carry additional complexity. If the term portion fails to convert to paid-up coverage as originally designed, the death benefit in later years can drop, or the cost to maintain it can increase unexpectedly.
The Automatic Premium Loan (APL) feature is another area requiring attention. If a whole life policy lacks this feature and a premium is missed, the policy may revert to a reduced paid-up status without any notice. Confirming whether APL is included in every whole life policy in the portfolio is a basic but critical step.
Read More: Automatic Premium Loans: A Safety Net for Whole Life Policies
Oversight implication: Whole life policies warrant consistent annual review with a focus on dividend performance versus illustrated assumptions, loan balances, and the conversion status of any term component. These policies are stable, but not immune to drift.
Current Assumption Universal Life (CAUL): High Vigilance Required
CAUL policies represent one of the highest-risk categories in any TOLI portfolio and require the most intensive ongoing oversight.
These policies were sold on the basis of projected interest crediting rates that were often far above what the market ultimately delivered. Because CAUL policies offer complete premium flexibility after an initial minimum is paid, many were not funded adequately when interest rates fell. The result: a large volume of policies that are underfunded and at risk of lapsing without additional premium contributions.
Compounding this, insurance carriers have the legal right to increase the cost of insurance (COI) inside these policies, subject to maximum guaranteed rates. In recent years, a number of carriers have exercised this right, in some cases more than doubling the premium needed to sustain coverage. These increases must be tracked as they occur, and options must be developed and documented each time a change is noted.
Oversight implication: CAUL policies should be reviewed more frequently than once a year — ideally on a semi-annual basis, or any time a COI increase is announced. In-force ledgers should be regenerated regularly, and the file should contain signed documentation confirming the grantor’s awareness of current performance versus original projections.
Read More: Things Trustees Should Know as Life Insurance COI Rates Grow
Guaranteed Universal Life (GUL): Low Complexity, High Premium Precision
GUL policies were designed in direct response to the performance failures of CAUL policies. They offer a contractually guaranteed death benefit — often to age 100 or beyond — in exchange for a fixed premium that must be paid in full and on time.
The tradeoff is that the premium flexibility that characterized earlier universal life products is largely gone. If a premium is missed or paid late, the death benefit guarantee can be compromised — typically by lowering the age to which the policy is guaranteed. Most GUL policies offer a catch-up mechanism, but these policies should never be managed with the assumption that flexibility exists.
GUL policies also accumulate little to no cash value in later years. The policy is designed purely to deliver a death benefit, and the grantor and beneficiaries must understand this from the outset.
Oversight implication: GUL policies require relatively straightforward oversight — but it must be precise. The primary risk is premium timing. Administration systems should flag premium due dates with ample lead time, and trust documentation should make clear that the trustee is not responsible for guarantee loss resulting from late or insufficient gifting to the trust.
Variable Universal Life (VUL): Active Investment Management Required
VUL policies are the only policy type that places investment responsibility directly on the policy owner. Cash values are invested in separate accounts — essentially mutual fund clones — and the policy stays in force only as long as those account values are sufficient to cover monthly charges. If markets decline significantly, the policy can deteriorate rapidly.
Federal guidance on fiduciary administration of unique assets specifically calls out that the annual review checklist for any variable policy should include confirmation that the separate account allocation has been reviewed. This is not a one-time step — it is an ongoing responsibility.
Oversight implication: VUL policies require the most active oversight of any policy type. Investment allocations must be reviewed regularly, re-projection of premium needs based on current performance is essential, and documentation must reflect that the grantor understands returns are not guaranteed and that additional premium may be required.
Read More: Variable Policy Oversight: How Trustees Can Reduce Risk in Fluctuating Markets
Matching Oversight to Risk
Industry experience suggests that at any given time, approximately 20% of policies in a trust portfolio have issues that could create liability. These issues cluster in three areas: high probability of lapse, significant loan balances, and insufficient premium levels. The policy types most likely to fall into these categories — CAUL, VUL, and blended whole life — are precisely the ones that demand elevated review frequency.
A one-size-fits-all annual review may satisfy a regulatory checkbox. But protecting beneficiaries and minimizing trustee liability requires something more thoughtful: a tiered oversight approach, calibrated to the inherent risk of each policy type. Knowing what kind of policy you’re managing is the starting point. Knowing what that means for your review calendar is what separates adequate from prudent.
Read More: Growing Risk in TOLI: What New Data Reveals About Trust Management
tolimonitor, ITM’s comprehensive ILIT administration solution, is built to support trustees with this challenge. Our team of life insurance experts review and manage policies across every type in your portfolio to help ensure that each policy receives the level of oversight its design demands — reducing risk, surfacing issues early, and keeping trustees ahead of their fiduciary obligations.
