Weeding out investor originated life insurance policies may be a difficult task, but it is also necessary for the financial and moral health of the life insurance industry, according to speakers at the American Council of Life Insurers’ annual meeting in Orlando.
Unfortunately for life insurers, while they may wish to separate investor originated policies from the few policies that are sold because they are no longer needed, doing so is a difficult task.
“It’s easy to say we can separate them,” noted Ken Kies, managing director of the Federal Policy Group, a practice of Clark Consulting in Washington, “but as a technical matter it can be very difficult to separate investor initiated policies.”
Some states, even while trying to curb the use of investor originated insurance policies, are also making it difficult. Mr. Kies, as well as other speakers on the panel, noted that a bulletin issued by the Louisiana Department of Insurance in early September, while intending to help reduce investor originated policies, also barred insurers from denying a policy based solely on the insured’s intent to sell the policy or how that policy is financed.
Mr. Kies argued that the stakes for life insurers in the investor originated life insurance debate are extremely high, specifically the favorable tax treatment of death benefits. “This type of transaction is clearly putting at risk the very tax benefit the life insurance industry has been offering for decades,” he said. “If anyone believes the current situation that we enjoy [can continue], then we are kidding ourselves.”
Additionally, he said that insurer pricing, which assumes a certain amount of policy surrenders, could be affected by the increasing use of investor originated policies. “Pricing is an issue,” he said. “It’s clearly an issue out there.”
Stanley Tulin, the vice chairman and chief financial officer at AXA Equitable Life Insurance Company who is retiring this year, said that the issue of investor originated policies also runs afoul of “the very basic purpose of life insurance itself, which is to provide for those left behind.”
Since its beginnings in the United States just before the first Lincoln Administration, life insurance has existed “to deliver death benefits to widows and orphans,” Mr. Tulin said. “I believe that’s an idea we should protect.”
A homeowner wouldn’t let an investor take out fire insurance coverage on their home, Mr. Tulin argued, and investor originated life insurance creates even more potential for a conflict of interest. “My house can burn down when I’m not there,” he noted.
Mr. Tulin said that 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 he said the financial machinations used to get those policies are designed to ensure that the issue “is going to be around for a while.”
Among what Mr. Tulin considered the worst of the financial means for investors to originate a policy are what he called “hybrid programs,” or what another panelist, ACLI associate general counsel Michael Lovendusky, referred to as “finance to bleed” programs. Under such a program, Mr. Tulin said, the investors make a loan to the insured, which covers the costs of the policy. The loan is repaid through a percentage of the death benefit, or the debt is erased if the policy is transferred to the investor after 2 years.
Under these programs, Mr. Lovendusky said, the insured’s survivors “are lucky to walk away with 5% of the death benefit.”
Mr. Tulin reiterated his belief that investor originated policies are a risk to the industry. “It is not good public policy. It is not good moral policy, and it cheapens the product,” he said.
Mr. Kies echoed that sentiment, saying that those who push for allowing investor originated policies “wish to exploit our industry and, ultimately, destroy it,” but he also said that the industry shouldn’t look to Washington to help it weed out the bad actors.
“Do not expect Congress to come along and solve this problem,” he said, adding that the issue is “may be the biggest challenge that the life industry has faced going back to Lincoln.”