Since the collapse of the global markets, wealthy families have been examining their investment portfolios and expecting due diligence and transparency from all of their advisors. But they should also expect no less from those managing their trust-owned life insurance.

Life insurance is no longer a sleepy, static, buy-and-hold asset. The trustee of life insurance held in trust-typically in an irrevocable life insurance trust (ILIT)-must regularly perform due diligence on the policies held in trust, and compare the past and projected performance of existing policies with that of  newer products and strategies.

In fact, a trustee should expect to make changes in trust-owned life insurance just as he would expect to make changes when managing a traditional investment portfolio held in trust. A trustee will typically allocate assets and retest and rebalance the model as time goes on as part of the trust's ongoing management. The same should be true of a large trust-owned (TOLI) life insurance portfolio.  Since life insurance often represents a concentrated asset held in trust, and is a complex asset for even professional trustees, the management of trust-owned life insurance presents some unique challenges for most trustees of ILITs.

A Dynamic Asset
There is now well in excess of $1 trillion of life insurance held in trust, much of it in ILITs. Wealthy individuals typically ask friends or relatives to serve as trustee of the ILIT. Sometimes a professional advisor or financial institution, such as a national bank or trust company, is asked to fill the role. The trustee should, but often does not, participate in the process of selecting the initial policies to be owned by the ILIT. But trustees still need to be familiar with the insurance product landscape.

One reason they need to be aware of the industry is because it is continually changing. Insurance products continue to evolve as do actuarial assumptions and pricing. While there have been very few truly new life insurance products developed over the last few decades, one product has been introduced that is truly unique: secondary guarantee universal life.

Secondary guarantee-also called "no lapse"-universal life (NLG UL) features low cash values and guaranteed death benefits, premium amounts and durations. The product has flourished. Even if the life insurance carrier later drops its policy crediting rate or increases its "cost of insurance," the secondary guarantee stays in effect. If premiums are paid in a timely fashion, the carrier will pay the death benefit. In an NLG UL policy, investment risk has been shifted to the carrier.

A confluence of events, however, has caused carriers to reconsider the product, with some suspending the issuance of new NLG UL policies and others repricing policies about to be issued. Bond portfolio losses, more stringent capital and reserving requirements and the cost and supply of credit to backstop NLG UL policies have forced most carriers to reassess the future of this product. Future changes in its design can be expected. For example, it's feasible carriers issuing new NLG UL policies will curtail lifetime guarantees in favor of less costly guarantees extending only through age 90.

As a result, those who have purchased a diversified portfolio of NLG UL policies in the past few years will likely determine that it is an extremely valuable asset whose benefits cannot be replicated in newer NLG UL products.

Advisors can expect continuing changes in product design and pricing availability, with new opportunities looming and then disappearing more quickly than in the past. It's an environment that makes it incumbent on trustees to continually monitor trust-held life insurance.

"Non-guaranteed" policies, such as whole life, universal life and variable products, are interest rate, dividend or market sensitive, and their performance must be monitored annually. Even NLG UL policies should be reviewed every year to ensure that premiums were paid on time and the carrier guarantees remain in effect. A policy review every three years or more may be inadequate to capture recent deterioration in policy performance.