Lawyers And Accountants Need Help Understanding Cutting Edge Products

Many of our newer life insurance products are complicated and difficult for even insurance professionals to understand.

Those lawyers and accountants who are “trusted advisors” to purchasers of these products have an even greater difficulty understanding these products well enough to render intelligent advice to clients. The two of us seem to be receiving more and more inquiries from lawyers and accountants (and even from a few financial planners) about the technical elements of some of these new types of products.

The inquiries do not usually involve the tax treatment of insurance or annuities in general, but are more likely to be directed to the structure of the insurance products themselves and the treatment of the products themselves as “insurance” for tax purposes.

There seems to be an increased interest in large premium life insurance policies and annuity contracts. Many sales of these products reflect premiums well in excess of $1 million.

Obviously, a lawyer or accountant advising clients on such transactions wants to be sure the products being purchased qualify as insurance for tax purposes and meet all of the insurance standards that should apply.

Given that the subject of life insurance is rarely taught in law schools or accounting courses, most lawyers and accountants know little more about insurance than does the general public. When asked by their clients to advise on insurance, then, it is often easier to discourage their purchase than to expose that they are truly ignorant about life insurance and how it works.

As a result, most insurance professionals approach lawyers and accountants with a sense of dread–dread that the relationship will result in the death of yet another sale.

Questions that our legal and accounting callers ask run the gamut. Some questions concern the creation and validity of separate accounts. Others concern: protection of separate account assets from the claims of the creditors of the insurer and other policyholders in event of insurer insolvency; and protection of variable product premiums on their way into separate accounts.

Still others concern: protection of assets withdrawn from separate accounts as a result of death, loans or withdrawals; determination of adequate diversification of assets under the Internal Revenue Code; testing requirements for such diversification; and application of the concept of “investor control” of assets held in variable products.

We know of only one state (Connecticut) that includes life insurance as a subject on its bar exam.

Likewise, we are informed that the technical aspects of life insurance and annuities are not subjects on examinations for qualification as a Certified Public Accountant. It is unlikely that many lawyers or accountants have chosen to study insurance on their own (only a few law schools even offer the subject as an elective), unless they work for an insurer or financial institution.

Therefore, it is important that industry professionals do everything possible to make it easier for these “trusted advisors” to understand insurance products, so that that they can render valid advice about the products.

The industrys new cutting edge products make this problem even greater. With more and more sales of variable life insurance and variable annuities, the difficulty of understanding becomes even more of an impediment to legal and accounting reviews.

How to help? First, industry people need to be sure they understand the products themselves. Although available producer training materials cover a good deal about product usage, much less information exists about the technical structure of the products themselves and about the treatment of the underlying assets for tax purposes.

Even the training that is available on these subjects may be inadequate to provide the level of comfort that lawyers or accountants need in order to recommend purchase.

Perhaps we need a publication that provides as much technical detail about our products as we are used to receiving about the tax treatment of insurance from the National Underwriter Companys Tax Facts publication.

As things now stand, we know of no reference materials currently available that would enable an insurance professional or a lawyer or accountant to access the technical information that applies to these new insurance products.

Lawyers and accountants want to know if the products they are considering for their clients are really “insurance” and if their clients are adequately protected. It is not reasonable for purchasers of life insurance products to have to seek counsel only from the handful of other lawyers and accountants who specialize in insurance in order to obtain the necessary information.

We, as an industry, need to provide better reference materials that will enable “trusted advisors” to render technical advice about technical insurance products. We can only hope that such materials will soon be available.

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. E-mail at Norse.Blazzard@BGHPC.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 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.


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