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RIC is a nation-leading independent risk manager partnering with over 200 corporate trustees

RIC is a nation-leading independent risk manager partnering with over 200 corporate trustees

We provide independent policy reviews, ILIT administration software, and remediation services for Trust Owned Life Insurance. As we do not market or sell insurance of any kind, our entire focus is on reducing fiduciary risk and helping trustees meet regulatory oversight requirements.

Inadequately funded policies-that is, policies lapsing before maturity or maturing with a significantly reduced death benefit-can compose a significant portion of a trustee’s life insurance portfolio. Clients are often content to “stay the course” with their policies, not wanting to or believing they can make any changes to a policy. As the time horizon to lapse shortens, however, the need to explore options to remediate the funding issues becomes more urgent.

It is natural to wait and focus on remediation options when there is more urgency, but it is prudent to consider these even when the time horizon is much longer, as options may become less attractive or not available as time passes. Not all will be suitable or attractive to your client, but discussing these options with a client may introduce them to possibilities with their policy they did not even know existed.

While not all-encompassing or applicable to every policy or situation, the following strategies are a good place to begin a conversation with a client whose policy in inadequately funded:

Pursuing any one of the below options may “solve” the funding issue, however, a more comprehensive exploration may identify that some options provide more value than others for your client’s particular situation

Many inadequately funded policies are simply a result of no longer funding a policy. Others have been funded more robustly but maybe inconsistently so, or they have been affected by reduced interest crediting or increased charges by the insurance carrier. Because of changes in crediting and charges, perhaps the “planned premium” that has been paid for many years is just no longer sufficient.

Adjusting the death benefit downward, whether via a face amount reduction or changing the death benefit option from increasing (face amount plus cash value) to level (face amount only) would yield lesser premium requirements

An insurance carrier can typically produce illustrations projecting the premium necessary to maintain the policy to maturity or another target year. Of all the options to consider when remediating an inadequately funded policy, increasing the funding to the necessary degree is perhaps the most straightforward. If the means and desire to pay the increased premium amount are available and the current death benefit of the policy is still needed, the funding issue can be resolved with relative ease this way.

Paying substantially greater premiums, however, is often not financially feasible or attractive to the client. The current level of funding may even be sufficient to maintain the policy to maturity or other target year with a reduced death benefit. Depending on the amount of premium that has already been applied to the policy, there may be limitations as to how much a policy’s death benefit can be reduced. Similarly, the composition of the policy’s death benefit-such as various riders or additional insurance beyond the face amount of the policy-ount to which it can be reduced.

The client may be willing to increase funding of the policy but finds that the insurance carrier’s projection of the premium necessary to mature the policy is still too steep. The insurance carrier should be able to provide an illustrated scenario whereby the policy’s death benefit is reduced to the extent at which an increased level of funding would enable the policy to mature. The same caveats apply here in regards to reducing the death benefit: there may be premium or structural constraints that limit allowable funding or the reduction amount.