Life Companies, Agents Oppose Legislation Facilitating Speculative Uses Of Life Insurance
Industry Applauds Special NAIC Hearing in April on Viatical Settlement Model
February 22, 2006 – The life insurance industry opposes enactment in the states of bills based on the National Association of Insurance Commissioners' (NAIC) Viatical Settlement Model Law unless they can be amended to close a loophole that has opened the door to speculative uses of life insurance.
Contact
ACLI: Jack Dolan (202) 624-2418
jackdolan@acli.com
AALU: Tom Korb (703) 641-8120
korb@aalu.org
NAIFA: Lee Allen (703) 770-8112
leeallen@naifa.org
adp@wswdc.com
Organizations representing the industry are the American Council of Life Insurers (ACLI), the Association for Advanced Life Underwriting (AALU), the National Association of Insurance and Financial Advisors (NAIFA), and the National Association of Independent Life Brokerage Agencies (NAILBA).
First adopted in 1993 by the NAIC, the model was designed to govern the sale by terminally ill individuals of their life insurance policies to unrelated third parties.
"We supported the model to make viatical settlement agreements available to policyholders with terminal illnesses who were in need of funds for medical expenses. The model provides important disclosures and protections to consumers at a very vulnerable time in their lives," ACLI President & CEO Frank Keating said.
But these viatical transactions have spawned new types of life insurance arrangements. Investors with no traditional insurable interest in an individual are initiating coverage on healthy older people and funding the premium payments. Under one scheme, the expiration of a policy's two-year incontestability period triggers a transfer of ownership or control of the policy to the investors who will receive the death benefit when the insured dies. In still another scheme, policy transfers don't take place, but arrangements are made for policy death benefit payments to go to investors.
"These are abuses of the purpose of life insurance, which is the cornerstone of financial security for millions, enabling families to protect their loved ones and businesses to plan for the future with confidence," NAIFA CEO David Woods said.
"An unrelated third party should not be allowed to initiate a life insurance contract on a person's life. These transactions circumvent the intent of state insurable interest laws. When a life insurance policy is purchased it should be intended for the benefit of a person who has a relationship to the insured and an economic interest in their longevity," said David Stertzer, CEO of AALU.
The life insurance industry is working to close the loophole in several states -- Alabama, Arizona, California, Illinois, Indiana, Kentucky, New Hampshire, New York, Rhode Island and South Carolina -- where legislation is pending. These bills, which provide for the overall regulation of viatical settlement transactions, must be clarified to prohibit transactions that are against sound public policy.
"Initiation of death benefit protection is for parties with a personal, business or charitable relationship with insureds. It is an abuse of the product if stranger investors initiate coverage for the sole purpose of being enriched by the death of an insured. We will oppose any legislation that fails to reinforce this fundamental concept in life insurance law," NAILBA Chairman Matthew McAvoy.
The life insurance industry will also encourage the NAIC to take steps to amend the model so that it does not serve purposes that were not intended. The industry is particularly pleased that the NAIC has scheduled a special hearing on the issue on April 20 at the New York Insurance Department in New York City. Companies and agents alike will make clear that the industry must vigorously oppose any law that would legitimize transactions that undermine state insurable interest statutes.
The participants in these schemes avoid state insurable interest statutes because the policy ownership or control change occurs two or three years after the policy is issued, when the state insurable interest laws technically have not been held to apply. The original purpose of the incontestability clause is violated.
In a related development, the New York Department of Insurance held insurable interest was lacking under existing law where, the ruling noted "it appears that the arrangement is intended to facilitate the procurement of policies solely for resale." (http://www.ins.state.ny.us/rg051215.htm).
Like the New York Department, the life insurance industry has strong concerns about and oppose utilization of life insurance products where the arrangements are designed to circumvent the purpose of state insurable interest law.
About ACLI: The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association whose 377 member companies account for 91 percent of the life insurance industry's total assets in the United States, 90 percent of life insurance premiums and 95 percent of annuity considerations. In addition to life insurance and annuities, ACLI member companies offer pensions, including 401(k)s, long-term care insurance, disability income insurance and other retirement and financial protection products, as well as reinsurance. ACLI's public Web site can be accessed at www.acli.com .
About AALU: The Association for Advanced Life Underwriting (AALU) is a nationwide organization of life insurance agents, many of whom are engaged in complex areas of life insurance such as business continuation planning, estate planning, charitable planning, retirement planning, deferred compensation and employee benefit planning. AALU represents approximately 2,000 life and health insurance agents and financial advisors nationwide. The mission of AALU is to promote, preserve and protect advanced life insurance planning for the benefit of its members, their clients, the industry and the general public. AALU's website can be accessed at www.aalu.org.
About NAIFA: Founded in 1890 as the National Association of Life Underwriters, the National Association of Insurance and Financial Advisors comprises 800 state and local associations representing the business interests of 225,000 members and their employees nationwide. Members focus their practices on one or more of the following: life insurance and annuities, health insurance and employee benefits, multiline, and financial advising and investments. NAIFA's mission is to advocate for a positive legislative and regulatory environment, enhance business and professional skills, and promote the ethical conduct of its members. NAIFA's website can be accessed at www.naifa.org.
About NAILBA: The National Association of Independent Life Brokerage Agencies (NAILBA) is a nonprofit trade association with 330 member agencies in the U.S., representing 100,000 producers who deliver more than one billion dollars in first-year life insurance premiums annually. NAILBA is dedicated to fostering the growth of its member agencies by providing educational resources, industry standards and a collective voice for legislative and regulatory efforts. Each of NAILBA's members commits to a statement of responsibilities to ethically and responsibly serve their clients' best interests. For more information, visit www.nailba.org.