VUL Agents In Business Market Face A Licensing Dilemma
Judith A. Hasenauer
During the past few years, variable universal life and variable life insurance policies have become the products of choice for most individual and business-related insurance sales.
In fact, by the end of last year, most insurers reported VUL sales had exceeded sales of traditional fixed life insurance products.
It is likely that the VUL product has been most used in business-related insurance programs. Although such programs are often lumped together under the label “COLI” (corporate-owned life insurance), we usually think of COLI as referring only to the very large corporate insurance cases, not to the general small-business programs.
Unfortunately, whether the VUL sale is made to a giant corporation or to a “mom and pop” small business, the product will still be treated as a “security.” Hence, the salespeople involved must possess the necessary federal “licenses” before they can sell the product.
COLI cases sold to giant corporations are often done on a private placement basis. Doing so permits the sale of an unregistered policy because the sale is made to a sophisticated entity that probably does not need the same consumer protections afforded to smaller, less sophisticated entities.
However, whether it is an unregistered product sold on an unregistered basis to a giant, sophisticated corporation, or a fully registered product sold to a mom-and-pop business, the VUL is still a “security.” As such, it must be sold under the auspices of a broker-dealer that is registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers Inc.
You might argue that this is common knowledge. After all, everyone knows that variable annuities and VL insurance are securities that must be sold by a person associated with a broker-dealer.
However, what many producers are discovering is that the licensing requirement for the sale of securities–even though the securities being sold are also life insurance products–imposes new requirements that will forever change the way life insurance agents have traditionally done business.
Once upon a time in the life insurance industry, agents were held captive to a single insurer. These agents placed all of their business with the single insurer and, in effect, sold what their insurer made available to them to sell.
As the years passed, insurers began to seek distribution outside of their own captive agency forces and the brokerage business was born in the life insurance industry. Sophisticated life insurance agents quickly found that no single insurer could supply all of the products needed to meet the needs of a sophisticated clientele, particularly when the needs for business-related insurance became more pronounced.
Fortunately, the facility existed under state insurance licensing laws for an agent to become appointed by a number of insurers. This enabled agents to seek the insurers that would develop the products that were suitable for the business and estate planning needs of their customers. Thus, very few agents today sell products of a single insurer.
But, when variable insurance products began to be widely sold, life insurance agents began to run into trouble with their traditional practices of seeking suitable products from whichever insurer was willing to develop them.
Here is the problem: The Rules of the NASD give the broker-dealer, not the registered person, the exclusive right to determine what products the broker-dealers registered persons will be permitted to sell.
Therefore, the only way a life insurance agent who is a registered representative can sell securities products that are not permitted to be sold by his or her broker-dealer is to change broker-dealers to one that will permit sales of the products the insurance agent wants.
Most insurance agents began in the variable insurance business by selling VAs. It was rare for agents specializing in business insurance sales to need to look outside of his primary insurer for VAs–because such products are not really suitable for business-related uses.
So, as these agents began selling VAs, they usually had their NASD registrations at the broker-dealer of their primary insurer.
Then, as VL sales began to grow in more recent years, many agents wanted the same flexibility to broker VL insurance as they had with selling traditional fixed products. Yet, it is a rare insurer-affiliated broker-dealer that will go to the trouble of offering VL products of an insurer that is in direct competition with its parent.
An additional factor enters into this licensing situation. NASD Rules and the federal statutes governing the sales of securities require a person selling a security to sell only products that are “suitable” for the needs of the purchaser.
This raises some puzzling questions: What happens if the only VL policies a broker-dealer will permit to be sold are not suitable for the business use for which it is intended? Or even if the products are legally “suitable,” what if they are not appropriate for the business use for which they are intended?
The agent faces a dilemma. He or she is only supposed to sell products that are legally suitable for the clients needs. Yet if the agent sells such a product, but his or her broker-dealer does not approve it, the agent has violated a different set of rules. Moreover, as a professional, the agent should select only those products that are appropriate for the customers needs.
This dilemma will hurt agents as they try to sell VL insurance for business-related cases.
It is already causing a number of sophisticated agents to seek different broker-dealer affiliations where they will be able to obtain the products they need to service the business insurance market with products that are not only legally suitable, but are appropriate to the purpose.
Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are principals in the Westport, Conn., and Ft. Lauderdale, Fla., law firm of Blazzard, Grodd & Hasenauer, P.C. You can e-mail them at Norse.Blazzard@BGHPC.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.