Sign In
  • InsideTrack
  • ,

    Legislative activity on insurance regulation: Annuity suitability and life settlements of policies

    The Wisconsin Insurance Commissioner seeks authority to monitor and regulate two areas of insurance sales: the suitability of the sale of annuities to consumers, and the purchase and sale of life insurance contracts by insured owners during their lifetimes. Both of these areas related to life insurance have seen rampant abuses by sellers and brokers in recent years, according to Barbara Becker.

    Barbara Becker

    Annuities

    April 7, 2010 – Wisconsin Insurance Commissioner Sean Dilweg has requested additional statutory authority to monitor and regulate two areas of insurance sales: the suitability of the sale of annuities to consumers, and the purchase and sale of life insurance contracts by insured owners during their lifetimes.  Both of these areas related to life insurance have seen rampant abuses by sellers and brokers in recent years, generating a need for more specific and broader legislation to allow the Office of the Insurance Commissioner to monitor and police these sellers and brokers.

    The annuity suitability bills, SB 572 and AB 811, require that sales people elicit information from prospective purchasers on  financial and tax status, risk tolerance, liquidity needs, financial horizon, the intended use for the annuity, and whether the annuity will replace an existing annuity.  The bills also require that the consumer be given information on surrender charges and on increased fees for replacing an existing annuity.

    The legislation also requires specific training on annuities before a license to sell is issued.  Sales people are required to make reasonable efforts to elicit the suitability information from the consumer.  And it prohibits the insurer from issuing an annuity that the sales person has recommended unless it is reasonable to believe that the annuity is suitable for the consumer.

    Attorneys who work with the elderly often see clients sold annuities that are entirely unsuitable for their circumstances.  Seventy- and eighty-year-old clients with health problems who are likely to need liquidity to meet increasing health care needs are being sold deferred annuities with substantial penalties for surrender of the annuities within anywhere from seven to 15 years after purchase of the annuity.  It is not uncommon for an older person to be sold a deferred annuity by a bank teller solely on the basis that the annuity offers a higher guaranteed income stream than a certificate of deposit.  The teller almost never solicits the suitability information before making the sale, does not explain clearly enough about the surrender penalty, and does not disclose the extra compensation the teller receives for making the sale.

    It is not uncommon for an annuity to have features that consumers cannot understand, such as investment in subaccounts that mimic mutual funds with the risk of loss from investment.  Consumers frequently are surprised that they or their beneficiaries have to pay ordinary income tax on the earnings when the funds are distributed. They fail to comprehend the difference between tax deferred and tax free.

    SB 572 has passed the Senate.  AB 811 had a public hearing in the Assembly Insurance Committee chaired by Rep. David Cullen on March 11, 2009, but has not been passed out of committee yet.  Action in the Assembly is needed in the short floor period remaining this month for the bills to become law in Wisconsin.

    The life settlement of life insurance policies and the practice of strange-originated life insurance (STOLI) are areas badly in need of updating and regulating in Wisconsin.  Life settlement of insurance policies became more common when AIDS first made rapid inroads and those infected individuals needed to sell their life insurance policies for more than the cash surrender value to finance their medical care or just to allow them to pay their bills and enjoy their limited life expectancies.

    In recent years, a new vigorous life settlement industry has arisen, engaged in brokering high value policies to consumers generally over the age of 70 with premiums paid with proceeds from non-recourse loans.  These policies are usually purchased with an unwritten understanding that the policies will be sold by the insured owner as soon as the two-year incontestability period has passed.  The policy is collateral for repayment of the premium loan.

    This practice of brokering policies that insured owners never intended to keep to maturity, or even keep more than two years, is lucrative for consumers enticed to buy them, because the sale of the policy will bring much more than the cash surrender value, albeit less than the death benefit on the policy.  By having the insured buy the policy, the STOLI industry has avoided the bar of lack of an insurable interest in the life of the insured.  The insured buyer has no personal financial risk because of the non-recourse financing and, at most, will lose the policy if the loan is not paid back after two years.

    Even more lucrative than buying the policy is brokering the non-recourse loan and selling the policy to a syndicate of investors looking to buy these policies.  This practice also is more lucrative for the lenders who charge very high interest rates for the premium loans.  So, who is harmed in the STOLI transaction?

    The harm to older consumers is that the life policy is now owned by strangers who have no insurable interest in the insured and who would rather see the insured die sooner rather than later.  In addition, the STOLI consumer may no longer have any insurable capacity, having used it up on the STOLI policy.  If family needs for insurance arise, as with a spouse who becomes disabled or a grandchild born with significant medical problems, the consumer will not be able to obtain the needed life insurance.

    The consumer may also receive a large surprise at tax time when learning that the settlement proceeds are taxable as ordinary income not entitled to the tax-free status of life insurance proceeds paid to a beneficiary at the death of the insured.

    But, even greater harm may come to Wisconsin consumers, because life insurance premiums are likely to rise in the future.  Lapse rates assumed by the issuing insurance company in the underwriting process do not presently take into account the never-lapsing STOLI policies owned by the investor syndicates.  If premiums rise and life insurance becomes unaffordable for middle-class families, those families will be harmed when the breadwinner dies an untimely death.  Small businesses will suffer if insurance becomes unaffordable for key-person or cross-purchase funding purposes.

    Commissioner Dilweg testified in the hearing before the Assembly Insurance Committee that his office and those of other state insurance commissioners have received many complaints on these policies.  He stated that the face value of the policies sold has been dropping from the $1 million policies down to $250,000 and even lower, indicating a spread in the targeted consumer groups to whom the policies are being marketed.

    SB 513 has passed the Senate.  AB 758, the companion bill, had a public hearing in the Assembly Insurance Committee on March 11, but no committee action on the bill has followed to date.

    The bills deal with training and licensing of insurance sales people.  The bills require full disclosure to the prospective purchaser, including the risks involved.  But, the most important provision in the bills is the prohibition on the sale of a policy in the first five years after its issuance, except for a substantial change in circumstances permitting an earlier sale.  The exceptions cover every conceivable justifiable reason for needing an earlier sale within the first five years.  Five years will discourage the non-recourse financing and the sale of these STOLI policies.

    On behalf of the State Bar’s Elder Law Section, Barbara Becker testified in support AB 758/SB 513, the life settlement of life insurance policies and the practice of strange-originated life insurance (STOLI) bills, and AB 811/SB 572, the annuity suitability bills, before the Assembly Insurance Committee.

    Barbara J. Becker is of counsel to Becker & Hickey, S.C. Her practice includes elder law, Medicaid and estate planning, and special needs trusts for the disabled. She is a past chair of the Family and Elder Law Sections of the State Bar and is currently treasurer of the Elder Law Section.


Join the conversation! Log in to comment.

News & Pubs Search

-
Format: MM/DD/YYYY