Outsourcing is a word that has been bandied about in the business world. The term has been used interchangeably with off-shoring, the process of moving business positions and applications overseas where cheaper labor drives down costs. What I will be talking about is true outsourcing, the use of an outside US based firm to take over internal tasks. Outsourcing can lower costs, improve the customer experience, place the focus on core competencies, grow revenue, mitigate risk, and allow access to information and skillsets not held within your bank or trust company, accounting or law firm. Outsourcing the administration of your Irrevocable Life Insurance Trusts does all of this.
Although there are many reasons our clients turn to outsourcing, there is one factor almost always present when companies choose to work with us. Life insurance trusts often represent a minor revenue source for the client. This coupled with the potential liability associated with life insurance trusts makes it easy to construct a business case to allocate their human resources to other revenue generating ventures, while partnering with us to help manage their Trust Owned Life Insurance (TOLI) trusts.
In this piece, we will outline the TOLI outsourcing model. In our next post, we will review the advantages of outsourcing, economic and otherwise. In our last entry, we will describe the TOLI trustees’ Achilles heel and provide real-life examples of outsourcing limiting trustee liability.
Successful outsourcing of TOLI trusts begins with a thorough onboarding process. Authorizations are received from the trustee to gain access to policy information. The address of record is changed to the outsourced administrator so that all carrier and trust related documents go straight to the administrators address of record (all documents are placed in a secure system with trustee access). The onboarding process follows a prescribed checklist, including a consistent proven process to ensure all pertinent information is received. During the transition period, all information around the trust and policy is inputted into the TOLI management system and double checked. Dates and contact information are calibrated so that all notices go out on time to the correct recipients. Any special administrative notes are logged, for example, outside advisers authorized to receive reports, winter addresses for grantors, etc. During this time, regularly scheduled conference calls occur between the trustee and administrator to ensure the process is on schedule and to work through any complications. Certain administrative tasks are turned over at agreed to points in time, and after 30-90 days, full administration is transferred to the outsource firm.
During the transfer of administration tasks, initial policy reviews begin. Signed authorizations received from trustee as policy owner are used to gather the necessary information for the review. During the initial review, policies are categorized based on liability to the trustee while policies in need of immediate attention are placed into a triage queue. It has been our experience that between 15 and 35 percent of all policies will need urgent attention of some sort. After initial policy reviews are completed, policies will be reviewed annually within 60 days of their anniversary date, dependent on carrier response.
Full trust administration includes, among other things, sending gift notices based on policy premium, and follow-up Crummey notifications, which when signed and returned, are stored on the TOLI system. Client contact by the outsource administrator is up to the trustee, with some trustees preferring the outsource firm to be “invisible” while others allow them to make direct contact with the grantors and beneficiaries. During the administrative process, there will be inevitable events that will need the interaction and advice of the trustee, and a skilled administrative outsource firm should have experience in dealing with these matters. The relationship between the outsource firm and trustee must be one of partnership, with both working together to increase customer service.
Policy remediation is an integral part of the outsource solution. It is rare that a trustee has the resources to build an in-house team that can manage complex life insurance products and all the unique policy related issues that arise. Annual policy reviews are just the beginning of prudent policy management. The outsource firm should be able to provide succinct reports and analyses for a trust policy, especially when changes need to be made. For example, when a premium will be missed, a policy death benefit will be reduced, or a policy surrender is being contemplated, a thorough analysis should be completed. Although the trustee still has the responsibility to make decisions regarding the policy, a skilled policy review team can provide the information needed to make sure a prudent choice is made, and can provide the follow-up documentation necessary for the trust file.
Since the trustee is not abrogating responsibility for the TOLI trusts, it is important that there is clear communication and information provided. Regularly scheduled conference calls to review any issues should be supported with comprehensive reporting that will provide risk and compliance personnel with needed documentation about trust administration and policy condition along with actions and outcomes taken on any issues.
While the information above is not all encompassing, it does provide the framework of prudent TOLI outsourcing procedures. In our next installment, we will review TOLI outsourcing advantages, as well as the IT and security requirements you should expect from your TOLI outsource administrator.