One of the keys to having an Irrevocable Life Insurance Trust(ILIT) work is knowing that the insurance policy within the trust will have an adequate death benefit. The death benefit is what the life insurance will pay when the insured passes away. Often, this insurance is intended to provide liquidity for the family or to pay anticipated estate tax. It is important to any estate that created an ILIT to make sure that it will serve its purpose.
If the insurance policy is paying premiums out of its accrued cash value, then the policy death benefit may be being depleted simultaneously. It also may be that the cash value will dip below an amount that the policy requires. This can happen when the return on the cash investment for the policy is not as great as projected by the insurer at that time you purchased the policy. It the value reaches a certain low, the insurance policy will automatically terminate unless a premium supplement is made. There is not a guarantee that you will have adequate notice before such an event occurs.
Trustees for an ILIT have a duty to make sure that the policy does not terminate. One way the determine if your life insurance policy is healthy is to have an “enforced ledger” generated. This will allow the Trustee to check the “vitals” of the insurance to make sure that the policy is not in jeopardy.
I encourage ILIT Trustees to ask for an “enforced ledger”. We like Trustees to check the pulse of your ILIT.