Fiduciary Responsibility



For years insurance companies and their agents have presented myriad reasons for purchasing life insurance -- to protect heirs, pay estate taxes, as a tax-advantaged investment vehicle, to indemnify businesses for the loss of key employees, fund a business succession plan, etc.  But with the emergence of a secondary market for life policies, “insurance planning” is no longer a simple euphemism for “insurance purchase”.  Now those engaged in financial planning must consider the possibility of selling existing policies as well.  As we’ve seen from recent events on Wall Street -- analysts are being held financially liable for making blanket recommendations “to buy “ or “hold” stocks in their clients‘ portfolios, while ignoring the need to “sell” underperforming issues.  It is in an insurance agent’s best interest -- as well as policyholders’ -- to consider the possibility of selling insurance policies that no longer meet the client’s needs.

Anyone engaged in financial planning activities -- insurance agents, securities brokers, trust officers, accountants, lawyers, etc. -- should become familiar with  the new secondary market in life insurance and the opportunities it makes possible.  Some clients would pleasantly surprised to learn that a once-dormant assets may now be marketable. Other clients may hold their advisors financially responsible if they are not apprised of the possibilities available to them.  In either case, advisors should at least make their clients aware of the new market's existance.  Insurance and planning professionals have a unique and powerful opportunity to realize the benefits this industry has to offer. Because life settlements have become more regulated and monitored, professionals can confidently offer life settlements as a financial planning tool to their clients. They can also be on the cutting-edge of an industry that has already seen substantial growth and rewards nationwide.


Life Insurance Trusts

The emergence of the life settlement has altered the landscape of the insurance trust business. It has presented an alternative course of action for trustees of trusts holding policies that insure the life of the trust's grantor. This alternative significantly changes the options available to a trustee in a number of situations. In some cases, sale of a policy through a life settlement will benefit the trust and its beneficiaries with proceeds that may be substantially in excess of what the more limited options previously available permitted, or by opening to them an alternative that is more in keeping with their present interests.

Many life insurance policies are owned by  a trust; and in many cases, the policy is the only asset of the trust.  The question of the suitability of the existing policy to meet the purposes of the trust document under current circumstances or the present interests of the beneficiaries has not been a frequent subject of inquiry. Trustee inaction may have been defensible in times in which purchasers of such policies were not readily available and/or the limited range of options permitted no other course.  But the ability to sell policies through life settlements has turned that type of inaction into professional irresponsibility.   The Uniform Prudent Investor Act, drafted by the National Conference of Commissioners on Uniform State Laws in 1994, has been adopted in full by the legislatures of 35 states, and substantially so in several others.  This law states that it is the duty of the trustee of a trust containing a life insurance policy as an asset, to examine regularly the question whether that policy should be sold under a life settlement, and the proceeds thereof invested in assets providing a more immediate return, consistent with the trust's purposes.  

As one expert put it:  " a trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement in cases where:

The cash surrender value is being used by the trustee to pay the premiums of the policy;
In cases where the funds exist to pay premiums, they have become so expensive that it is no longer economically feasible to continue funding the policy;
The original purposes for the trust are now better served by other assets of the trust, or of the beneficial interest holders;
The original purposes of the trust are no longer relevant or valid, so that the sale of the policy and investment or distribution of the proceeds would be more compatible with the current interests of the beneficial interest holders of the trust. "

An Office of the Comptroller of the Currency regulation enacted in 1997 imposes additional responsibilities on national banks and the trust accounts they manage:

"Upon the acceptance of a fiduciary account for which a national bank has investment discretion, the bank shall conduct a prompt, written review of all assets of the account to evaluate whether they are appropriate…for the account.

"Once…during every calendar year…conduct a written review of the all assets, of each account for which it has investment discretion… to evaluate whether they are appropriate."