While banks move briskly to distribute and to a lesser extent underwrite insurance, they may be overlooking substantial, often hidden risks to which they are already exposed. Our concern centers on the fiduciary assets known as trust-owned life insurance, or TOLI.

TOLI is a life insurance policy purchased by a trustee to serve the interests of a trust and its beneficiaries. TOLI provides a financial vehicle for achieving specific objectives for the trust on an effective and efficient basis, such as paying or deferring taxes or moving assets from one generation to another.

An Office of the Comptroller of the Currency regulation that hit the books a year ago saddles national banks with a number of responsibilities:

"Upon the acceptance of a fiduciary account for which a national bank has investment discretion, the bank shall conduct a prompt, written review of all assets of the account to evaluate whether they are appropriate ... for the account.

"Once ... during every calendar year...conduct a written review of all assets, of each account for which it has investment discretion ... to evaluate whether they are appropriate.

"Once ... during every calendar year ... conduct a written review of the investment merit of each account."

We believe that these requirements include TOLI policies. We also believe most banks are not meeting their obligations to manage TOLI-related risks.

More than $1 trillion in life insurance is now held by irrevocable trusts, and it's estimated that as much as 30% of this total is held in bank trusts. The aggregate amount in TOLI is increasing as life insurance plays a larger role in estate tax planning and second-to-die coverage.

We would not have been overly concerned about TOLI risk without the failures of Executive Life, Confederation Life, Mutual Benefit Life, and others in the 1990s.

A large superregional bank reviewed its TOLI portfolio last summer and found 16 policies written by Executive Life, which failed in April 1991. The existence of these policies, coupled with the absence of proactive communication with the Executive Life receivers, raises the question of prudent trust management.

Banks can incur major financial losses-and damaged reputations-from litigation relating to a single trust or a class action.

In light of the OCC's regulations, issues of suitability and policy performance are increasingly prominent. A study of a large portfolio of TOLI policies held by a cross section of bank trustees indicated a 75% chance that the death proceeds payable to a trust, for the benefit of its beneficiaries, could be increased by 40% or more with no increase in planned funding. Or, alternatively, funding could be reduced 40% or more with no decrease in death benefits payable to the trust.

Once bank management recognizes that TOLI presents significant risk, they can effectively manage this risk by actively assessing TOLI policies within the framework and objectives of the trust before they are purchased.

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