The Lapsing Policy Crisis and Credible Policy EvaluationMany skilled and unskilled trustees of Irrevocable Life Insurance Trusts (ILIT) lack life insurance expertise, dispute defensible policy evaluation expertise and ILIT administration capabilities; however, every trustee should be familiar with today’s lapsing policy crisis and adopt credible policy evaluation standards for recurring TOLI policy performance reviews.What are credible policy evaluation standards?1.Set simple and defendable policy performance criteria. If a policy will not sustain to the insured’s life expectancy or five years beyond life expectancy, then it is an underperforming by any prudent standard for TOLI policy evaluation. Policy type (UL, VUL, WL,) is a product risk criteria selected by the trustee and while one trustee may be comfortable with higher product risk than another trustee, every TOLI policy should be purchased and managed to sustain to the insured’s life expectancy or 5 years beyond at a minimum.2.Life insurance illustrations for nonguaranteed products are not credible evaluation tools by themselves. Guaranteed policy illustrations are credible but nonguaranteed illustrations disclaim predictive value and should be treated as “source” data for actuarial evaluation (the credible evaluation tool for nonguaranteed products). Actuarial evaluation can determine if the inforce illustration COI charges are more or less favorable than the benchmark model average and can suggest correcting premiums, asset allocation, etc. to sustain the policy to an intended insured age. COIs less favorable than the benchmark model suggest it may be appropriate to investigate alternative policies.3.Evaluate every policy to the fundamental policy performance criteria. It does not matter if a policy is a term, WL or UL policy, it should be evaluated based on its sustainability to the insured’s life expectancy or five years beyond life expectancy and, if it is a nonguaranteed product, then actuarial evaluation is the prudent evaluation standard.4.Set a consistent policy performance review frequency for all TOLI policies. For regulated trustees, compliance regulations dictate an annual policy review frequency. For accommodation trustees, the frequency may be every one, two or three years. Keep to a schedule and if a grantor does not want to have a nonguaranteed policy regularly reviewed, then decline to serve as trustee.5.Communicate policy performance to trust parties. Reviewing policy performance is meaningless if the trustee does not communicate performance to trust parties. The failure to communicate policy performance is a major factor leading to litigation.6.Document underperforming policy decisions. If a grantor is not willing to participate in any corrective action (i.e. increase ILIT gifts to fund additional premiums), the trustee should document that decision and communicate it to all trust parties. For older insureds, notify trust parties of Life Settlement options for underperforming or unneeded policies. Many accommodation trustees do not understand that they may be able to sell a lapsing or unneeded policy for significant dollars.