It was gratifying to see that a regulatory panel convened for the summer meeting of the National Association of Insurance Commissioners took the definite step of going on record against the expansion of state insurable interest laws. Now it is up to the full NAIC to put the seal on this resolution.
The unfortunate expansion of insurable interest laws has picked up speed in various jurisdictions around the country and it can only be hoped that if state insurance commissioners come out against it that legislators in their states will pay heed.
Among states that have expanded such laws are Texas, North Carolina and Tennessee.
The case of Texas, which has seen the proliferation of products made possible by the broadening of insurable interest laws, is particularly revealing. Back in February a resolution was put forth at NCOIL by a Texas legislator urging other states to oppose expansion efforts. Essentially, the message was “not to do what Texas did.”
It’s hard to overstate how important this issue is for the business. The tax-favored status of life insurance is put in danger if it is perceived by lawmakers to be simply another financial vehicle for making a buck.
What’s pushing this is something relatively new to the market called investor-owned life insurance (IOLI), wherein a third party with no connection or insurable interest to the insured essentially uses the insured’s life as an investment.
This is usually done through a charity and is used in tandem with an annuity purchase that funds the life insurance premiums.
In fact, at the NAIC meeting, as reported by Jim Connolly, J. Leigh Griffith, a Nashville attorney who represents LILAC Capital, said IOLI was really an arbitrage between the pricing of two different products, an annuity and life insurance.
Just what the business needs–an equivalent of a hedge fund based on insuring people you don’t know!
Griffith tried to pull a fast one by saying that if regulators were going to look at IOLI, then they also should be looking at life settlements.
To put it mildly, this is disingenuous in the extreme. Griffith surely knows that the crucial difference, as life settlement people were quick to point out, is that in a life settlement the policyholder initiates the transaction. This is not the case with investor-owned life insurance.
Now, there are some in the life insurance business who have very little use for life settlements. But it can’t be denied that they are growing very quickly and the reason seems to be that they are filling a place for policyholders whose need and/or use for their policy is no longer what it was when they purchased it.
Investor-owned life insurance, on the other hand, uses the cover of a charity to make someone’s life just another financial vehicle in the marketplace.
This technique would not go very far if the charities themselves put up a big stop sign and said, “No way!” But apparently some charities are so hungry for donations that they will countenance transactions that fail the smell test. These charities really should be ashamed of themselves.
While life insurance has been put to many business uses, at the heart of the product as we know it in this country is a noble impulse–the insured’s desire to protect loved ones after he or she has passed away. Something like investor-owned life insurance, which moves so far from this noble basis, inevitably cheapens the concept and should be banned.
This technique would not go very far if the charities themselves put up a big stop sign and said, “No way!” But apparently some charities are so hungry for donations that they will countenance transactions that fail the smell test. These charities should really be ashamed of themselves.”