Weeding out investor-originated life insurance policies is necessary for the financial and moral health of the life insurance industry.
Speakers made that argument here at the annual meeting of the American Council of Life Insurers, Washington.
Separating IOLI policies from policies that are being sold because they are no longer needed is easier said than done, said Ken Kies, a federal policy specialist in the Washington office of Clark Inc.
The Louisiana Department of Insurance, for example, tried to describe procedures that insurers can use to avoid IOLI transactions, but it also barred insurers from denying a policy based solely on the insured’s intent to sell the policy or on how the policy is financed, Kies said.
The IOLI industry is threatening favorable tax treatment of life insurance death benefits and could affect policy pricing, Kies said.
Stanley Tulin, the chief financial officer at AXA Equitable Life Insurance Company, New York, who is retiring this year, said IOLI clashes with insurers’ mission “to deliver death benefits to widows and orphans.”
Many insurers are doing what they can to identify applications filed for investor-originated coverage, and some have even conducted investigations of life insurance trusts, but the financial machinations used to get those policies are designed to ensure that the issue “is going to be around for a while,” Tulin said.
Tulin complained most about “hybrid programs,” or what another panelist, ACLI General Counsel Michael Lovendusky, called “finance to bleed” programs.
Program investors make a loan to the insured that covers the costs of the policy, and the lenders get a percentage of the death benefit, or the debt is erased if the policy is transferred to the investor after 2 years.
The insured’s survivors “are lucky to walk away with 5% of the death benefit,” Lovendusky said.
“Do not expect Congress to come along and solve this problem,” Kies said.
The issue is “maybe the biggest challenge that the life industry has faced going back to Lincoln,” Kies said.