ILIT Trustees – Examine Your Policies

Life Insurance

Life insurance trusts (ILITs) are a popular estate planning technique used to shelter life insurance proceeds from estate taxes, creditors and mismanagement by beneficiaries. While the insured is alive, generally the only asset of an ILIT is the life insurance policy.  However, ILIT trustees have a duty to make sure that the policy is a sound investment, and may be liable to the beneficiaries if it is not.
So, for ILITs that have owned the same policy for several years, the trustee should ask the following questions:
  • Is the policy performing as illustrated?  If the policy was obtained when interest rates were high, the initial illustration probably assumed a relatively high interest rate for the life of the policy.  However, in the last several years, interest crediting rates for universal life and participating life dividends have been lower.  Market downturns have also adversely affected the performance of variable products.  Failure to address this issues could cause polices to lapse.
  • Is the policy sufficient for current needs? Changes in the insured lfe and beneficiaries lives, along with changes in estate tax and other laws, may make adjusting the death benefit advisable.
  • Is there a more competitive policy available? Life insurance rates on similar policies tend to drop over time.  Longer life expectancies, lower mortality costs, and improvements in underwriting all contribute to lower current costs.
  • Do newer policies offer better features? Limited guaranteed policies are now available, along with riders for return of premium, accelerated death benefits,  and long term care benefits.
  • Is the insurance company financially strong?  Life insurance companies are rated for financial strength and stability by ratings services such as Moody’s A.M. Best , and Standard and Poors.  Is your carrier’s ratings decline significantly, consider switching to a stronger company.
Have an insurance professional conduct a few on the policy every few years to make sure that you are fulfilling your fiduciary duty and reducing the risk of future legal action by beneficiaries.
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