Failing to audit trust-owned life policies creates risks
If you have a life insurance policy held in trust or if you are a trustee for an estate or other entity that owns a life insurance policy, we have an important question: when was the last time the trust-owned life insurance policies were audited?
If it’s been more than three years since the last audit, you should be aware that the trustee can be held personally responsible for any alleged financial loss or underperformance. If the beneficiaries feel the trustee failed to adequately monitor and measure the ongoing performance of the policy, the trustee could―at the very least―be guilty of ignoring his/her responsibility to the trust.
“Modern” practices required
It is no longer prudent to put trust-owned policies into a file drawer until the death of the insured because most states, including Ohio, have adopted the Uniform Prudent Investor Act which requires trustees to:
- Apply modern investment practices in managing trust assets
- Create a form “Investment Policy Statement” describing how assets will be managed and evaluated
The Act covers all trusts owning life policies, including Irrevocable Life Insurance Trusts (ILITs).
Recommended safeguard
We recommend that any trust-owned life insurance policy purchased more than three years ago undergo an independent review or “audit” by the life policy experts on our team. Our audits are comprehensive and thorough, covering important factors such as:
- Precise nature of the policy and how it is structured
- Current financial goals of the trust
- Current sustainability of the policy and guaranteed future performance
- Financial strength of the carrier
- Appropriate options that might be available to the trust
- Appropriateness of a current or future sale of the policy in the life settlement market
Sometimes, the audit reveals the current policy carrier is financially weak, or the policy is underperforming and could possibly lapse, unless higher premiums are paid. In some instances, the insured is no longer medically insurable. However, if our audit finds the coverage is with a strong carrier, is performing as originally projected/guaranteed, and is still meeting its intended need, no changes are normally recommended.
Due diligence files
Trustees will receive a written report from us for their due diligence files, validating that they acted on their fiduciary responsibilities.
It’s possible that a policy audit can reveal an opportunity to lower the premium costs, provide better coverage, or both. In recent years, many life carriers have introduced lower-cost, stronger guaranteed products that stem from underwriting changes because of longer life expectancies. In fact, some people who have had cancer, but now have a documented positive change prognosis or are in permanent remission, can obtain a policy at standard rates, for the advantage of the trust.
In summary, we strongly urge you to have us conduct an audit of the true value and performance of all life insurance policies―whether held in your own trust or in a trust you oversee. We look forward to hearing from you.
Oswald Companies is an award-winning consultative insurance brokerage and risk management firm and the insurance partner for The Ohio Society of CPAs. Oswald became the official administrator for the Society’s member insurance programs April 1, 2007.If you have specific questions regarding this change in our insurance programs, please call CPAnswers, the Society’s member service center, at 888.959.1212 or Oswald’s Ohio Society of CPAs insurance hotline at 888.767.4548.
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LAST UPDATED 1/14/2008