Troubling Trend for Trust-Owned Life Insurance Trustees - Why Now? - Actions and Considerations for Trustees

Sep 16, 2026

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Troubling Trend for Trust-Owned Life Insurance Trustees discusses how prolonged historically low interest rates can disrupt life insurance policy assumptions within irrevocable life insurance trusts (ILITs). It explains the litigation risk trustees may face as trust beneficiaries experience financial loss when policies deteriorate or become worthless. The article outlines why this timing matters and analyzes dividend reductions, premium impacts, and cost-of-insurance increases, emphasizing that trustees must proactively review trust terms and long-term investment assumptions.

LanguageEnglish

CategoryLetters

FormatPDF

Pages7

Reading Time3 min

AccessFree to download

Why now?

Low interest rate impacts on policy performance

What is a trustee to do in these turbulent times?

Read the trust

Troubling Trend for Trust-Owned Life Insurance Trustees A life insurance trust may seem easy to ad minister, but prolonged low interest rates can upend policy assumptions , requiring trustees to be proactive . A growing concern for many estate planning professionals is that over the next ten to 15 years there will be an onslaught of litigation by trust benefici aries against the trustees of irrevocable life insurance trusts1 (ILITs) because the asset that the trustees were charged with safeguarding has imploded or become worthless. The primary concern is for the trust beneficiaries themselves because of their financial loss, but there is also concern for the trustees. Many of these trustees will be the aunts and uncles of the beneficiaries, or the close family friend of the settlor, or perhaps the solopractitioner attorney or accountant who agreed to serve as trustee because the grantor had nobody else to ask. Of course , “prof essional” trustees will not be immune from this either, whether the trustee is an individual corporate trustee, a bank , a trust company, or an attorney in a larger or more sophis- AMI EL Z. WEINSTOCK ticated law firm whose practice routinely includes serving as trustee (as is common in a city like Boston) . This article explores some of the basic parameters of the trustee’s job description and highlights actions and considerations for those trustees as they do their best to serve the settlor and beneficiaries of their trust. Why now? Over the past several years , the global economy has experienced historically low interest rates and dividend returns. Many older policies have been adversely affected by these reduced interest rates . Whole life policies are dependent on the performance of dividends, which are determined by a company ’s mortality, expense , and AMIEL Z. WEINSTOCK is an attorney in the Boston , Massachusetts , office of Morgan , Lewis & Bockius LLP. He prepares estate plans for high-net-worth families and is frequently asked to serve as a trustee for his clients. interest experience. While expenses are controllable and mortality has improved over the past decade, interest rates have forced companies to reduce dividends cons istently year after year. For many of these older policies, the impact of the lowered dividends may have been (1) an increase in the duration of required premiums, (2) the triggering o f an automatic premium loan, or (3) for policies with nonguaranteed term blends, an increase in premium amounts or a decrease in death benefit amounts. Universal life policies have had similar results, as the interest crediting rates have decreased to the point that they are now at the minimum guaranteed levels. For non-guaranteed universal life products, these rate decreases will decrease the duration of coverage that the specified premium will carry, or else increased premiums will be required to keep the policies on track in the future. In addition, insurance companies have started to announce cost- 3 of-insurance increases, which could have a negative impact on policy performance . These increases are due to underperforming blocks of business that threaten the longterm financial stability of the insurance company. As a regulated industry, each insurance company is required to show good solvency; therefore , insurance companies tend to invest in safer asset classes, such as Treasuries and municipal bonds. Thus, in the current interest rate environment, they are investing a large portion of their premium revenue in vehicles that are yielding very low returns. The good news is that they tend to invest in long-term vehicles and are still benefiting from the blend of their older investments. The downside is that as the higher-yielding bonds mature, they are being reinvested in much loweryielding options . Anyone who understands the law of averages will recognize that this issue is going to continue until a sustained period of high interest rates; i. e . , ju

FAQs

Why are low interest rates a major problem for ILIT trustees now?

Historically low interest rates have reduced dividends and interest crediting rates on older life insurance policies, which can lengthen premium duration, trigger premium loans, and worsen death benefit outcomes. This creates conditions where policies may underperform or fail to meet assumptions.

What litigation risk do trustees face over the next ten to 15 years?

Trust beneficiaries are expected to pursue litigation against trustees of irrevocable life insurance trusts because the assets trustees were meant to safeguard have imploded or become worthless. The article highlights concern not only for beneficiaries’ financial loss but also for trustees themselves.

What should trustees do to respond to these turbulent conditions?

Trustees should read and understand the trust terms and their obligations, then scrutinize the policy assumptions built into the coverage. They should consider how interest-rate trends will affect the policy long-term, rather than assuming rates will quickly improve.

Sep 16, 2026

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