Is It Time to Reevaluate Your Clients’ Trust-Owned Life Insurance Policy?

By Michael W. Halloran, CFP®, AEP®, ChFC®, CLU®

Whether owned in a revocable or irrevocable trust, many practitioners have used life insurance over the years. Depending upon the type of policy as well as current economic conditions, some problems could arise with many existing Trust Owned Life Insurance (TOLI) policies.

The majority of problems with TOLI policies lie in irrevocable trusts. Many times the trustee places the policy in the trust without checking with the company to see if the policy is sustainable for the intended purpose of the trust.

The coverage needs to stay in-force until the death of the insured or insureds (if a joint life policy) if the primary purpose of the TOLI policy was to pay estate taxes or buy assets from the estate. If a Universal Life policy is over ten years old and was illustrated on a minimum premium basis, there is a substantial chance that the policy will not be sustainable to age 100. Interest crediting rates have gone down in that period of time, thus jeopardizing the long term viability of the traditional Universal Life product at the initially quoted premium level.

The trustee should ask the issuing company for an in-force ledger both at the current rate being paid and also one at the guaranteed rates that are published in the policy.  Upon obtaining the illustration, the trustee should look at the death benefit columns of both the current and guaranteed rate to see if the policy stays in-force to age 100 or later. If the policy does not stay in-force, the trustee should ask the insurance company what premium would be necessary to keep the policy in-force to the insured’s projected age of death.

Assuming that the insured or insureds can still qualify for coverage, the trustee should see if they can obtain coverage from the same company or a competing company on a policy that would continue in-force to age 100 or later. In either case, the policy could be exchanged under Internal Revenue Code Sec 1035 without a taxable event occurring as long as the transfer was from the first policy to the successor policy.

The poor economy has lowered the earnings capacity of most insurance companies; as a result of this and other reasons, the rating agencies have lowered the financial strength ratings of many insurance companies. As part of the due diligence process, the trustee should also obtain the financial strength ratings from the four major agencies: Moody’s, Fitch, Standard and Poor’s, and A.M. Best. The rating agencies grade companies on a different basis from each other. The trustees can judge which rating companies are more conservative in their evaluation by getting the rating as well as the rating menu. The trustees should choose to have the life insurance in-force from highly rated companies.

An elementary point that should be made, as was mentioned in the first part of the article, is the purpose of the coverage. If coverage is needed until death, then term insurance is usually not the appropriate solution. The client should purchase some type of permanent coverage, either Universal Life or a type of Whole Life.

It is important to know if the Universal Life product has “secondary guarantees” that are designed to keep the policy in-force, even if there is no cash value, until the death of the insureds. The trustee should make sure that they have not violated any of the provisions in the policy that would enable the insurance company to drop the guarantee. An example of these provisions would be: making policy changes, making a cash value withdrawal or policy loan, paying the premiums late (even one day late depending on the policy), changing the amount of coverage, as well as others. The trustee should ask the company what would be required to rectify the guarantee, as well as any additional costs, if they have violated one of those provisions.

If the policy was a blended permanent policy (a combination of Whole Life and term insurance), the trustee should get an in-force ledger from the company to make sure that the policy is still fulfilling the needs for which it was purchased.

The estate tax laws have changed to currently allow a married couple to pass $10,500,000 of property (assuming the estate is set up properly) to their heirs without paying estate tax. The policy coverage may no longer be needed to pay taxes if the current trust was setup when the estate tax exemption amount was lower. In this instance, the question should then arise whether the policy should go to a paid-up status or continue to pay premiums based on other needs of the trust.

There are companies that will, for a fee, evaluate policies that are in trusts to help trustees do an impartial audit on the policies. Some large corporate trustees have set up departments in their organizations to do these audits. It is my opinion – – and that of courts that have held trustees responsible – – that audits should be done on TOLI policies to make sure they still fulfill the needs of the client and purposes of the trust.


Michael W. Halloran is a Wealth Management Advisor with Northwestern Mutual.  Mr. Halloran has been in the financial services industry for over 40 years.  In addition, Mr. Halloran is an Estate Strategies Group Advisor and is part of the Estate Business Planning Specialist Study Group.  He is committed to providing comprehensive, customized financial plans that reflect the clients’ values and support their lifelong goals.  More specifically, Mr. Halloran’s expertise lies in estate and business planning for individuals and businesses.

Mr. Halloran is the immediate Past President of the National Association of Estate Planners and Councils, past National Director of the Society of Financial Services Professionals, past Board of Directors of Florida Association of Insurance and Financial Advisors, past President of Jacksonville Association of Insurance and Financial Advisors, past President of the Estate Planning Council of Northeast Florida, is the Executive Director of Physicians Nationwide, is a Member of the Estate Strategies Group, and is involved on other various community organization boards.

Mr. Halloran can be reached through his website, by phone (877) 851-8242, or email

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