Managing Non-Guaranteed Universal Life Insurance Policies Within ILITs
Non-guaranteed Universal Life Insurance (UL) policies require periodic evaluation to prevent premature expiration, especially when held within Irrevocable Life Insurance Trusts (ILIT). Trustees of ILITs bear fiduciary responsibility to ensure policy assets align with trust objectives, primarily maintaining death benefits to their beneficiaries.
However, many trustees lack the expertise to manage these policies effectively and should seek professional consultation to avoid costly lapses. The life insurance industry estimates that 40-45% of flexible premium, non-guaranteed UL and Trust-Owned Life Insurance (TOLI) policies lapse prematurely, often well before the insured’s life expectancy, due to several factors. First, prior to 1982, life insurance policies were guaranteed.
The introduction of UL policies during a high-interest rate environment led to market confusion, as these policies require careful management of premium payments aligned with fluctuating interest rates. Decreasing interest rates since then have placed premium adequacy at risk, often unnoticed by policy owners or trustees.
Secondly, insurers and agents have not traditionally taken responsibility to proactively inform owners or trustees about premium adjustments necessary to maintain coverage, nor have other advisors like attorneys or CPAs typically managed this aspect.
As a result, policies may unexpectedly approach lapse, often with little time for corrective action. Thirdly, trustee inexperience and the absence of ongoing policy review contribute substantially to this risk. To manage this issue, trustees or policy owners should commission independent historic projections and life expectancy assessments to identify funding shortfalls. Available management strategies include increasing premium payments to maintain coverage, reducing death benefits to match current premium levels, purchasing new policies with enhanced benefits including long-term care, or pursuing life settlements when appropriate.
If continuation is financially unfeasible, surrendering the policy may be necessary, but only after evaluating outstanding loans and potential tax consequences related to policy gain. Regular biennial or triennial evaluations incorporating insurer cost of insurance changes and financial strength ratings can help trustees fulfill their fiduciary duties more effectively.
CPAs and attorneys, typically involved in family office management and trust administration, often do not engage with their clients’ life insurance portfolios, which can constitute a substantial portion of their estate planning assets.
This gap highlights a need for interdisciplinary collaboration and informed advice to trustees and policy owners on insurance performance and funding. Ultimately, awareness and proactive management of non-guaranteed UL and TOLI policies are essential to avoid lapses that undermine intended estate transfer and financial planning goals.