Results from the 4th Annual UPIA/TOLI Compliance and Best Practices Survey

4th Annual UPIA/TOLI Compliance and Best Practices survey results.  The following are the results of how the marketplace (as respresented by survey respondents) apply the Uniform Prudent Investor Act (UPIA) to the trust-owned life insurance (TOLI) asset.  As pointed out by a number of respondents, the below discussion of UPIA is only applicable in those states that have enacted legislation that is substantially similar to UPIA and who have not excluded life insurance from the standard of care otherwise prescribed by the Act.  I would also like to extend special thanks and acknowledgement to those for their personal interpretation and comments on the questions in the survey. The results of the survey are as follows:

Q #1:    The Uniform Prudent Investor Act (UPIA) requires ILIT Trustees to set reasonable expectations as to the performance of Trust‑Owned Life Insurance (TOLI) holdings that are appropriate in relation to the purposes of the trust, the skills of the trustee and 38% of all respondents indicated the rate of return to be used in setting such expectations should be the internal rate of return on the death benefit received in relation to the premiums paid.  A trustee charged with the responsibility of maximizing benefits relative to risk cannot use the internal rate of return on death benefits as their barometer for the reasonableness of TOLI performance since such it is entirely a function of the timing of the death of the insured and beyond the control of the trustee. 47% of you agree that a better measure of investment performance, therefore, is the investment performance of invested assets underlying policy cash values, which is needed to cover expected future cost of insurance charges (COIs) and policy expenses, and over which trustees can exert control. 

 Q #2:   Section 7 of UPIA specifically requires ILIT Trustees to "only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee" and 71% of respondents consider the policy expenses as to cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based "wrap fees" (e.g., M&Es) and premium loads underlying and generally used to compute TOLI premiums.

 Q #3-4: The Act requires that trustees follow a "prudent process" comprised of the three (3) duties to include the duty to monitor TOLI holdings, but 68% of respondents are either not monitoring or are performing this function internally.  Insurance policies as a trust asset deserve the prudent management much like a stock, bond or mutual fund holding.

Q #5-8: The Act requires that trustees follow a "prudent process" comprised of the three (3) duties to include the duty to investigate TOLI holdings, but more than 68% of those who are attempting to investigate suitability of TOLI holdings, 25% indicate they employ a practice that is actually prohibited by the Financial Industry Regulatory Authority (FINRA) because it is misleading (i.e., comparing illustrations of hypothetical policy values that comingle policy expenses and assumed investment performance).  To make matters worse, of those (mis)using illustrations of hypothetical policy values to investigate suitability, 53% are comparing inforce holdings to no more than 5 other products, which is hardly a representative sample of the market (i.e., less than 1-in-12 chance that randomly selected products would be representative for suitability determinations).  The good news here is that 15% of respondents (up for near 0% a few short years ago) are now actually investigating and justifying cost of insurance charges (COIs) and policy expenses as required under Section 7 and investigating and setting reasonable expectations for performance of invested assets underlying policy cash values as required under Section 2.  Thanks to more than half of you who use THEInsuranceAdvisor.COM to make such investigations easy, fast and more thorough than by any other means. 

Q #9:    The Act requires that trustees follow a "prudent process" comprised of the three (3) duties to include the duty to manage TOLI holdings in a manner that minimizes/justifies policy expenses and maximizes return relative to risk, and yet 76% of all respondents admit to performing this function internally, relying only on the agent or have no management of TOLI holdings at all.   

Q #10:  UPIA makes no distinction in the standard‑of‑care between investment trusts and ILITs, and while it is common for trustees of investment trusts to use written Investment Policy Statements (IPS), 38% of respondents say they do not have a TOLI Investment Policy Statement (TIPS), Statement of Suitable TOLI Holdings or Delegation Agreement.

Our thanks again to those who responded with thoughts, comments and interpretations of results from the 4th Annual UPIA/TOLI Compliance and Best Practices survey. If you have not yet participated in the UPIA/TOLI Compliance and Best Practices survey, then please click here to help contribute to an increasingly better understanding of how the Uniform Prudent Investor Act (UPIA) applies to the proper management of Trust-Owned Life Insurance (TOLI) policy holdings. 

Also remember to check out our TOLI ToolBox  for sample presentations, reference materials, example working documents and educational brochures all of which help the ILIT Trustees and those who work with ILIT trustees to better understand and fulfill their fiduciaries duties to monitor, investigate and manage TOLI holdings.