Life Insurance Balance Sheets: The Current Planning Environment as a Catalyst for Policy Reviews


The COVID-19 pandemic has boosted awareness and interest in life insurance like never before. Nearly a third of consumers (31%) say COVID-19 has made it more likely that they will buy life insurance in the next twelve months, according to a recent LIMRA study, and 102 million Americans believe they need more life insurance. Recently, tax proposals have threatened to radically change estate tax and trust planning, highlighting the policies held by trusts. Coupled with a renewed emphasis on the need for protection, now is the time to reach out to clients to review existing plans and coverage.

Why is policy review important?

Too often, life insurance policies are bought and largely forgotten. For personally owned policies, this can result in insufficient coverage, overpaying for coverage, family disagreements when beneficiary designations are not up to date, and more. By helping your clients and trustees perform routine policy reviews, you can uncover gaps in coverage and identify new planning opportunities.

The key to getting a customer to engage in the policy review and respond to your email or return your call is making sure you ask probing, personalized discovery questions. For example, consider asking:

  1. “What has changed in your life since we last met?” “
  2. “When was the last review of your policy? I’d like to take a look to see if it still works as expected.
  3. “There are important proposed changes to the tax law that I fear could affect your estate plan. I would like to discuss this with you as soon as possible.

When it comes to sending emails or leaving voicemail messages, often less is more. Keeping your message short, but briefly emphasizing the value you can offer, can lead to a callback.

Basic Principles of Policy Review

When you meet with your client, the first step in any policy review process is to understand why the insurance was purchased and whether the existing policy still meets that need today. This includes helping clients review beneficiary designation changes at least every two to three years or sooner if there has been a change in life circumstances, such as starting a business, marriage, divorce, childbirth or death.

The second step is to determine if the policy is still working as intended by examining the policy and the underlying investments. There are various reasons why a policy may not work as initially illustrated. For example, older whole life or universal life insurance policies may perform poorly due to a combination of factors, including a low interest rate environment and changes in the cost of fees. insurance from an insurer. Timing of premium payments and / or inadequate policy funding can also be a problem. In some cases, particularly where a poor performance of the contract and / or large loans to the cash value of the contract pose a risk of forfeiture of the contract, it may be necessary to increase the premium or reduce the principal – death. In other cases, a 1035 tax-free exchange policy may be advisable. For example, if an old mortality table has been used or if the insured’s health has improved, a new policy may result in lower premiums.

Policy replacement may also allow the client to achieve holistic planning goals, such as adding long-term care coverage, or providing clients with access to new products or functionality. products in the market.

Management of life insurance held in trust

In the context of policies held by irrevocable life insurance trusts, the routine review of policies by the trustee is particularly critical. Failure to proactively manage and administer an underlying trust policy can potentially thwart planning goals. In addition, the trustee may be held personally liable for breach of his fiduciary duty to the beneficiaries of the trust if a policy does not work as intended.

TOLI: A time bomb or a golden opportunity?

Trustees have a fiduciary duty to the beneficiaries of the trust, which means that they are required to manage the assets of the trust in the best interests of all beneficiaries and by maintaining an objective standard of care. For TOLI policies, the fiduciary responsibilities of the trustee include facilitating the ongoing payment of premiums, managing income tax and notifying Crummey beneficiaries. Trustees also have important investment obligations, as defined by the Uniform Cautious Investors Act and defined by case law over the years, requiring trustees to take a more proactive approach to policy management today. held by trusts.

There have been several notable cases where ILIT beneficiaries sued the trustee for breach of fiduciary duty. The TOLI litigation of the past decade has affected both corporate trustees as well as trustees who were “lay” trustees, such as family members and friends. Lay trustees make up about 90% of ILIT’s trustees, according to “The Life Insurance Policy Crisis,” by Randolph Whiteclaw and Henry Montag (American Bar Association 2017). The sad reality is that many lay trustees may be unaware of their responsibilities for ongoing assurance and investment management, and are less likely to have the expertise to understand the workings of insurance policies- life. These trustees may need to engage an independent entity to assess the health of the policy.

Insurance professionals also have a unique opportunity to work alongside trustees to assist with the ongoing review of policies and those who do may be well placed to uncover opportunities to help trustees achieve trusted goals. .

The Grantor Trust Tax Proposals as a Review Catalyst

Intentionally defective grantor trusts (“grantor trusts”) are a type of irrevocable trust that contains provisions or powers as defined in the Internal Revenue Code that cause the grantor to be treated as the owner of the trust assets. income tax purposes, but keeps the assets out of the trust for estate tax purposes. Today, most ILITs are also grantor trusts.

At the time of this article’s publication, the Senate was negotiating the Build Back Better plan, a comprehensive social spending bill whose costs are offset by several proposed revenue streams, including proposed tax increases for the wealthy. Although not in the current version of the bill, an earlier version contained a provision that would have resulted in the inclusion of property held in a transferor trust created after the date of enactment in the gross estate of the transferor, putting thus essentially end to the possibility of using cedor trusts for future planning. In addition, contributions to grantor trusts vested in after the enactment date would have resulted in partial inclusion of inheritance tax. This sparked an urgency for financial professionals and lawyers to reassess the plans of existing trusts and led to much discussion about the future of life insurance in irrevocable trusts.

At the time of printing, it seems less likely that these provisions will be included in the legislation that may ultimately become law. However, the weeks of uncertainty surrounding the planning of the grantor trust leave us both a lesson and an opportunity: Congress can be unpredictable, and these proposals could come back to the table in the future. So the time may never be better to revisit estate plans and revisit the underlying trust policies. In doing so, insurance professionals may discover the need to update or improve coverage to meet current planning goals and liquidity needs.

With so much general uncertainty, clients are probably more sophisticated than ever in their protection needs. Now is a great time to reach out to your customers to help them revise their policy. Financial professionals may find that taking the initiative helps build trust and strengthen relationships with clients and can help identify new insurance needs.

Caroline Brooks, JD, CFP, CLU, is Assistant Vice President and Legal Counsel for John Hancock Advanced Markets. She can be contacted at [email protected]

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