If you are acting as a trustee of an ILIT, beware that you may have liability if you mismanage the insurance policy.
A recently filed case demonstrates the risk: Brill vs. Morgan Stanley, Lincoln National Life, and Voya Retirement Insurance and Annuity Company filed April 17, 2019, in US District Court, Southern District of Texas, Houston Division. The lawsuit alleges that Morgan Stanley failed to notify the trustee of the increased costs needed to maintain the policy.
Mr. Montgomery, the insured, purchased a Lincoln Policy 21 years ago on the advice of his longtime advisor from Morgan Stanley. He named his daughter as the trustee of the Insurance Trust (ILIT). His advisors agreed to “administer the investment account to maintain the life insurance policy.” (1) The policy, a $2M survivorship life policy on Charles and his wife, was overseen by the advisors using funds from an investment account which was set up to fund this policy.
By 2018 over $400,000 had flowed through the investment account to pay policy premiums. The wirehouse managed the account, monitored the performance of the policy and paid timely premiums to keep the policy in force.
In 2016 Lincoln Financial, as well as other carriers, began to increase the cost of insurance (COI) on many of the policies. Mr. Montgomery’s policy was one of the 18 different universal life policies issued and/or administered by Lincoln Financial that saw COI increases. His specific policy was issued by Aetna Life but was now administered by Lincoln.
Lincoln notified all policy owners of the COI increase. As a premium payer, the wirehouse received this notice. The lawsuit alleges that Morgan Stanley failed to notify the trustee of the increased costs needed to maintain the policy. The increased COI costs had the effect of decreasing the cash value, and in July of 2018, the carrier sent a quarterly statement showing that the cash value was zero. The lawsuit claims that the defendant failed to “notify the Plaintiff of any issues with the performance of the Policy” prior to that.
The policy lapsed on June 25th, but the lawsuit claims that the trustee was not notified until early August of 2018 of the lapse. Although the trustee was willing and able to pay all of the back premiums, they were unable to have the policy reinstated.
This case is pending in the courts so check back for the result. One thing is apparent in reading about this lawsuit – no matter who is administering an insurance policy, make sure all involved parties are aware of changing policy details.
Life insurance is a complex asset that needs to be managed by experts.
(1) Brill vs. Morgan Stanley, Lincoln National Life and Voya Retirement Insurance and Annuity Company filed April 17, 2019, in US District Court, Southern District of Texas, Houston Division.