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The Prudent Investor and Trust-Owned Life Insurance: from American Bankers Association Trusts and Investments

The adoption by most states of the Uniform Prudent Investor Act (UPIA) has far-reaching effects on trust drafting and administration. One of the often overlooked consequences of the Prudent Investor Act is its effect on the administration of irrevocable life insurance trusts (ILITs). This article will address the unique (and often opaque) nature of life insurance as an investment and the effects the Prudent Investor Act can have on trustee ownership of life insurance.

Part 1 - The Prudent Investor Act, Modern Portfolio Theory & Trust-Owned Life Insurance (TOLI) reviews the theorical underpinnings of the Prudent Investors Act and discusses the way these theories can adversely effect how trustees invest for particular families. It then explores the Prudent Investor Act itself, and the types of drafting and administration issues it engenders. [click here for Part 1]

Part 2 - Factors Determining TOLI Pricing, Performance & Suitability looks at the nature of life insurance as an investment, focusing on factors that go into pricing insurance products and the effects that those factors have on policy performance. [click here for Part 2]

Part 3 - Establishing a Basis for ILIT Compliance (and Best-Practices) looks at investment performance and policy expenses. Under the Prudent Investor Act, irrevocable life insurance (ILIT) trustees must establish and follow a prudent process for determining the suitability of TOLI policy holdings and managing such TOLI holdings in response to changing market conditions. Compliance hinges on process, not performance. [click here for Part 3]