People are used to getting checkups — portfolio reviews, an annual physical, trip to the dentist, and even regular car maintenance. But what about checking up on their life insurance policy?

Many times, life insurance policies are purchased and largely forgotten. For personally owned policies, this approach can result in insufficient coverage, paying too much for coverage, coverage not lasting as long as initially projected, family discord when beneficiary designations are not up-to-date, and more.

For trust-owned life insurance (TOLI), the stakes may be even higher. Not only can failing to proactively manage and administer an underlying trust-owned policy create problems, but if a policy does not perform as expected, the trustee may be held personally liable for breach of fiduciary duty to the trust beneficiaries.

Life insurance, like any financial asset, must be routinely evaluated and managed to ensure it reflects changing planning objectives and market conditions.

Mericle & Company can help clients and trustees conduct these policy reviews and, in doing so, avoid or anticipate potential policy issues and identify key planning opportunities.


Life Insurance Policy Review Basics

The first step in any policy review is to understand why the insurance was purchased and determine if the existing policy is still meeting that purpose today.

This includes reviewing beneficiary designation changes at minimum every two to three years — or sooner if there has been a life change, such as a business start-up, marriage, divorce, birth of a child, or a death.

The second step is to determine if the policy is still performing as intended by reviewing the underlying policy and crediting method. There are a variety of reasons a policy can fail to perform.

For example, older whole life or universal life policies may be performing poorly due to a combination of factors, including a low-interest rate environment and changes to a carrier’s cost of insurance charges.

The timing of premium payments and/or inadequate funding of the policy can also be an issue. This may be particularly so for trust-owned policies where the trustee may be dependent on annual gifts to the trust for premium payments.

In some cases, poor policy performance, missed premium payments, and/or large policy loans will negatively impact the policy’s cash value forcing the policy owner to increase premiums or reduce the death benefit.

In other cases, it may make sense to consider a tax-free 1035 exchange of the policy to another for improved performance. For example, if an older mortality table was used or if the insured’s health has improved, a new policy may mean lower premiums. Replacing the policy may also allow the client to address additional planning goals.


Managing Trust-Owned Life Insurance (TOLI)

Trust-Owned Life Insurance policy should be reviewed by the trustee on a semi-frequent basis.

Trustees have a fiduciary duty to the trust beneficiaries. This means the trustee is required to manage trust assets with the best interests of all beneficiaries in mind.

When life insurance is owned by a trust, the fiduciary responsibilities of the trustee include ensuring premium payments are being made, Crummey notices are provided to beneficiaries1, and the policy is performing as intended.

The Uniform Prudent Investor Act (UPIA) and further supported by case law requires that trustees proactively managing trust-owned policies.

Adopted in 1994, the Uniform Prudent Investor Act (UPIA), provides trustees with the “prudent process” they must follow when overseeing financial assets owned by a trust. The UPIA requires trustees to follow the Prudent Investor Rule, which includes keeping costs low and maximizing returns in relation to all trust assets according to the language of the trust.

Over the last several years, there have been several notable cases where beneficiaries have sued trustees for breach of fiduciary duty specifically for mismanaging trust-owned life insurance policies. These cases provide guidance for trustees when executing their fiduciary responsibility as it relates to managing trust-owned life insurance.2

The first case relating to the Uniform Prudent Investor Act and trust-owned life insurance was Cochran v. Key Bank. Cochran v. Key Bank provides clarity on the UPIAs “prudent process” standard for determining the suitability of trust-owned assets3, including life insurance.

Cochran v. Key Bank highlights that a trustee must:

  1. Continuously monitor the suitability of trust investments, including maintaining record-keeping and documentation process and bringing in third-party advisors when needed.
  2. Analyze the strengths and weaknesses of life insurance policy(ies) based on the overall investment strategy, trust objectives, and grantor intent.
  3. Take proactive steps to manage trust investments, including life insurance, to minimize ongoing costs and risk.


Trust-Owned Life Insurance (TOLI) — A Ticking Time Bomb?

The TOLI litigation of the last decade has impacted both corporate trustees as well as nonprofessional trustees (e.g. family members, friends, and advisors).

Corporate trustees, like banks and financial institutions, should have institutional policies and procedures in place to ensure their trustees are complying with the UPIA, but this is not always the case as we saw in Cochran v. Key Bank.

Nonprofessional trustees account for roughly 90-percent of Irrevocable Life Insurance Trust (ILIT) trustees4. Unfortunately, most nonprofessional trustees are aware of their responsibilities when managing investments and life insurance. And, even though they may be aware, their level of expertise relating to the mechanics of a life insurance policy may be minimal.

The reality is 39-percent of in force non-guaranteed universal life insurance coverage and 34-percent of in-force variable universal life policies are projected to lapse during the insured’s lifetime or within 5-years of their life expectancy5. If trustees are not managing trust-owned life insurance policies, we could see an increase in litigation against professional and nonprofessional trustees who have failed to fulfill their fiduciary obligation.

Reviewing an annual statement is insufficient when trying to determine the health of the policy. A comprehensive review process should be implemented and updated routinely. Life insurance policies can be complex financial instruments, it makes sense for most trustees to engage a third-party expert to evaluate and analyze the health of a policy to fully understand how it is performing. This allows trustees to make informed decisions on behalf of the beneficiaries. It also gives trustees a documented process to help them satisfy their fiduciary responsibility.

Delegating the investment responsibilities to a third-party is also a factor courts have considered when determining if a trustee has met their fiduciary duties to monitor, investigate, and manage policies.6 Financial professionals can help trustees monitor policies, and help identify risks and opportunities to align with the goals of the trust.


Life Insurance Premium Financing Considerations

It is not uncommon for policies with substantial premiums to be paid for via a loan from a bank (commonly referred to as life insurance premium financing) or via an intra-family loan from the grantor to the trust. When this is the case it is especially important to review the policy since there are a number of variables that can negatively impact the arrangement including, but not limited, interest rate fluctuation, policy performance, collateral requirements, loan interest, and repayment of loan via the policy at a point in the future.

A complete review of the financed life insurance policy and loan on at least twice a year is critical as it can create an additional layer of risk for trustees. By understanding the position of the policy and loan on an ongoing basis is critical to the overall health and success of the strategy.

How Mericle & Company Can Help

Permanent life insurance is a complex product that is constantly evolving. Crediting or dividend rates used to project a policy’s performance over an insureds lifetime will have a drastic impact as to whether the coverage will be there when the insured dies. In addition, many policies give an insurance carrier the ability to make changes to mortality costs and other policy expenses, further impacting policy performance.

By proactively managing and routinely reviewing a policy’s performance empowers individuals and trustees to make policy decisions before the coverage becomes too expensive to maintain. Our process allows us to obtain and analyze information from insurance carriers to develop a plan of action to ensure optimal results are achieved.


  1. Crummey notices are used when money is placed in a life insurance trust. A Crummey notice is used to turn a future gift into a present gift. See Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).
  2. See Cohran v. Key Bank; French v. Wachovia; Paradee v. Paradee; Rafert v. Meyer.
  3. Stuart Cochran Irrevocable Trust, 901 N.E.2d 1128 (Ind. Ct. App. 2009).
  4. Randolph Whiteclaw and Henry Montag, “The Life Insurance Policy Crisis,” American Bar Association (2017).
  5. Trust Owned Life Insurance (TOLI) Issues. (March 17,2017) Shenkman Law,
  6. In re Stuart Cochran Irrevocable Trust, 901 N.E.2d 1128.

About Jason Mericle

Jason Mericle is the founder of Mericle & Company. Partnering with a specialized team of advisors, he is able to help business owners significantly reduce taxes, protect assets, and create tax-favorable income.

He compliments his extensive knowledge of tax strategies and products with an in-depth understanding of the different tax and legal structures for which they are used.

About Jason Mericle

Jason Mericle is the founder of Mericle & Company. He has partnered with a unique team of professional advisors specializing in helping business owners significantly reduce taxes, protect assets, and create tax-favorable income.

Jason compliments his extensive knowledge of tax solutions and products with an in-depth understanding of the different tax and legal structures for which


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