An option to investigate, however, is if the term policy has a provision to be converted to a permanent plan of insurance. Depending on the age and health of the insured, a permanent policy may have value through a life settlement, once again providing the trust with a monetary alternative to the policy ceasing without value.
The best course for ongoing policy management when a client wishes to suspend premium will depend largely on the needs of the trust and exact options available for that particular policy. It is important, however, to carefully consider all of those available options. While the current death benefit persisting to the insured’s age 90 may seem sufficient, a reduced death benefit guaranteed to maturity would eliminate any risk of the insured outliving coverage. Likewise, surrendering the policy for its current cash value may be a good option if the policy is no longer needed; however, ensuring a life settlement would not yield an even greater cash payout would be a prudent action by a trustee. Working through available options with a client not only fosters a good relationship with them but may also payday loans Delphos present them alternatives they did not know existed.
RIC provides unparalleled service to trustees and fiduciaries managing unique and hard-to-value assets. We are an independent risk manager and Registered Investment Advisor with the specialized expertise required to manage, analyze, value and administer trust owned life insurance, annuities, variable invested assets, closely held businesses and other unique assets. Since 2001, RIC has been the nation’s leading provider of independent risk management solutions for banks and trust companies.
We hear it all the time from Trustees managing ILITs. Your client no longer wants that life insurance policy they took out years ago for estate planning purposes. The original reason for the policy is no longer applicable and now they want to cease paying premiums (and trust fees). Your client is comfortable with surrendering the policy back to the insurance company without understanding all available options, or perhaps you have an agent or financial advisor pressuring you to sign a pile of paperwork to sell the policy via a life settlement (and if you don’t sign them immediately you will lose the offer). Even if you make an informed fiduciary decision and decide to move forward with a life settlement, how do you know the policy sale will be handled with a fiduciary standard of care?
As a fiduciary, first and foremost it is important to be aware of all policy remediation options, including life settlements. The policy owner receives a cash payment, while the purchaser of the policy assumes responsibility for all future premiums and receives the death benefit upon the death of the insured. While RIC advocates maintaining life insurance if your client has the ability and willingness to fund the policy and if it still plays a role in the financial or estate plan of your client, life settlements may be suitable if you have narrowed your remediation options down to surrendering the policy back to the insurance company or letting the policy lapse on an insured typically over the age of 75.
So why are life settlements becoming more popular for ILITs? More than 40% of the trust owned life insurance policies RIC reviews each year are identified as being inadequately funded – either lapsing prior to maturity or maturing with a significantly reduced death benefit. Often a much higher annual premium (versus the original planned premium) would be required to prevent a future lapse of the policy and more often than not the increased premium is unaffordable. Additionally with the tax laws effective in 2018, the ambiguity around calculating the tax for a life settlement transaction was eliminated and the overall tax liability has been reduced making life settlements more attractive. Correspondingly, 43 states and the territory of Puerto Rico now regulate life settlements, providing disclosures and protections for policy sellers. This confluence of more and more underfunded policies combined with the changes in the tax and regulatory landscape make life settlements an increasingly common remediation tool for fiduciaries.