TOLI Trustee Alert: More of Your Clients Will Be Living to 100 and That Could Be a Problem

A little over five years ago we wrote about a little-known problem for trust-owned life insurance (TOLI) trustees – clients living to age 100 – the maturity age for many older life insurance policies. The problem is that many policies in their portfolio will not pay out a full death benefit at maturity and the chances of insureds living to maturity are increasing.

According to a Bloomberg article, “Over the past few decades, the average person’s lifespan has risen almost everywhere in the world,” and the wealthy “are counting on living even longer.” (1) In a survey referenced in the article, “53 percent of wealthy investors said they expected to live to 100.”  While that might not be the case, the wealthy – your TOLI clients – do tend to live longer.  According to the National Academies of Science, Engineering and Medicine cited in a Washington Post article, while the average life expectancy for a 50-year-old male in the lowest economic quintile is 76 years, it jumps to almost 89 years for those in the highest quintile. (2) 

The issue around insured living to age 100 is acknowledged by the life insurance industry, and policy design has been altered.  Policies issued today run well past age 100, most to age 121 and some carriers have modified their older policies to extend the maturity date past age 100. 

The reason? 

Some older policies mature at age 100 for cash value only, creating two issues. 

  1. If the policy matures for the death benefit and the cost basis is less than the amount received by the trust, the proceeds above cost basis are subject to taxation, just as if the policy were surrendered for its cash value. The amount taxed would be at ordinary income, not capital gains rates.
  2. The more common occurrence is that the policy matures with minimal cash value, much less than the death benefit that the beneficiaries expect.

What can a TOLI Trustee do?

  • When a policy comes into your trust make sure your documentation notes what happens if the insured is still alive at policy maturity – especially if the policy is an older policy. Make sure that all pertinent parties to the trust are made aware.
  • When an insured reaches age 80 and certainly by age 85, make sure that the annual policy reviews highlight the policy maturity outcome.
  • Review the policy funding with the grantor.  For policies that mature for cash value only, the only way to receive the full benefit is to fund the policy to endow (cash value equals death benefit at maturity).  While the option to fund a policy at the endowment premium, which is typically much higher, is rarely done, showing the grantor (and beneficiaries) the funding option should be part of your prudent process.
  • For those insureds who reach age 85 and beyond, a life expectancy (LE) report should be considered.  These reports, which cost less than $500, provide the TOLI trustee with another essential data point – a systematic estimation of an insured’s remaining life, which should be made a part of the trust file. 

Managing life insurance is not an easy task.  The age 100 maturity issue is just one of many problems you will encounter, but it is one you can easily deal with well ahead of time.     

  1. The Rich Are Betting On Living To 100, Ben Steverman, http://www.bloomberg.com, April 20, 2018
  2. The Stunning – And Expanding – Gap In Life Expectancy Between The Rich And The Poor, Max Ehrenfreund, September 15, 2015

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