Now Is the Time to Consider Outsourcing Your Irrevocable Life Insurance Trust Administration – Second of a Three Part Series

In our last entry, the first of this three part series, we outlined the TOLI outsourcing model, starting with onboarding the trust and policy, through the full administration process and touching on remediation. In this entry, we will discuss the advantages of outsourcing for the TOLI trustee.

For most trust companies and banks, trust owned life insurance (TOLI) is not a growth business. Federal estate tax changes over the last decade have dramatically affected the number of estates subject to the tax, and thus, the number of new trusts created. Certainly, there are reasons other than estate taxes to hold a policy in a trust, but the estate tax is the main driver. Will the estate tax change to favor the use of insurance trusts again? Maybe. But since this business line is also fraught with liability, perhaps now is the time for you to explore why partnering with an expert TOLI outsourcing firm delivers these and other long-term benefits:

  1. Provides A Team of Life Insurance and TOLI Administration Experts: Banks generally do not invest in hiring and training independent, in-house life insurance experts and TOLI administration professionals as the revenue generated from life insurance trusts does not support the business case. Your in-house team might be fantastic at a number of things, but are they proficient at managing life insurance, an asset class that has endured tremendous stress in the last decade? Do they know how to deal with a cost of insurance increase (COI) that more than doubles the carrying costs of a policy? Do they know when it makes sense to sell a life insurance policy and the advantages and disadvantages of the transaction? Do they understand the possible tax trap in policy loans and the liability to you, the trustee? Maybe, but just last week we heard of another trustee writing an almost 6 figure check because a trust administrator missed a liability that would have been obvious to a person trained in life insurance policy management. Today, more than ever, you need experts keeping an eye on your life insurance trusts. Every day, we help our clients (and in turn the insureds and beneficiaries) make prudent decisions related to policies which often save them substantial sums of money or avert problems that could result in negative impacts to coverage. Do you have independent experts in-house?
  2. Focuses You on What You Do Best: Your staff might not be life insurance specialists, but they have core competencies that can help generate revenue in your firm’s profit centers. With the stress on banks to reduce headcounts and focus on profitable business lines, outsourcing a non-core function can help banks achieve these results.
  3. Identifies and Reduces Your Overall Costs: For most TOLI trustees, the relative small number of trusts managed does not lend itself to creating the efficiencies that a focused outsource firm can. A trustee handling different types of policies from numerous carriers must stop to research an issue that an outsource firm handling tens of thousands of polices has seen and solved many times before. The variation and complexity of life insurance policies is easier to manage when you can scale the process. The ability to interpret the administrative details of a trust document, oversee the compliant management of the trusts and resolve trust and policy issues quickly and prudently is enhanced when the experts are focused on one business line – life insurance trusts. In most trust situations, life insurance has taken a back seat to other, more profitable business lines, and the true costs to administer a TOLI trust are not even known. An outsourcing firm provides a fixed known cost, typically far less than current costs incurred by banks administering life insurance trusts in-house.
  4. Mitigates Your Legal and Regulatory Risk: One of the most important factors in managing a business line is recognizing and understanding inherent risks. TOLI is no different. While it may be a small part of your revenue stream, it is a major source of potential liability. When a business line that generates a $1,500 to $3,000 annual fee can lead to six or seven figure settlements, it is time to take notice. By outsourcing you can partner with experts in the field and benefit from their proven ability to plan and mitigate potential risks. Furthermore, with increasing regulatory oversight and compliance requirements, having a proven team and process helps avoid unnecessary pitfalls.
  5. It Brings Peace of Mind: Most trustees we speak with see TOLI not as a growing business line but as a growing liability - with good reason. The low interest rate environment, market volatility, and cost of insurance increases and we have seen in the last five years has made managing life insurance harder than ever. Further, retaining professionals in-house is not an option based on the economics.  Outsourcing your TOLI trusts to a firm that focuses on that one asset should help bring peace of mind. Once when we asked how we were doing on a call with a client, the head of compliance for the firm responded, “you are doing great, I sleep well at night.” At the end of the day, isn’t that all you really want?

In our last entry, we will review policy remediation services, the weak link in most TOLI trust offices. We will show actual cases where we saved grantors hundreds of thousands of dollars on cases that would have clearly created liability for the trustee. If you are TOLI trustee, it may be our most important blog entry ever.