“One thing we need to do is to better train our agents,” said Stephan Leimberg. “They need to know more about recent court cases and IRS rulings. And they need to know that form is not substance–that you’ve got to have both.”
On that note, Leimberg, who is CEO of Bryn Mawr, Pa.-based Leimberg Information Services, closed the opening general session of LIMRA International’s Advanced Sales Forum, held here last week. Joined by Thomas Commito, a director of sales concepts at Lincoln Financial Distributors, Hartford, Conn., Leimberg devoted the 90-minute presentation to reviewing key developments in life insurance, estate and income tax planning.
Prominent among those cited by the speakers was Mayo vs. Hartford Life Insurance, which involved Wal-Mart’s creation of a trust in 1993 to hold corporate-owned life insurance policies on the lives of its rank-and-file employees, naming Wal-Mart as the beneficiary. Because the employees never provided consent, the U.S. 5th Circuit Court of Appeals ruled that Wal-Mark lacked an insurable interest in the employees.
The case is in part significant, the speakers noted, because of the question of jurisdiction: A U.S. District court ruled that Texas law (rather than Georgia’s) governed the dispute; and in Texas, Wal-Mart was not permitted to receive COLI proceeds.
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“Which state law governs insurable interest disputes is increasingly an important issue,” said Leimberg. “Jurisdiction will be a key focus not in COLI cases, but also in those involving charitable owned- and stranger-owned life insurance.”
Leimberg added that, unless another state has a more significant relationship to the transaction, state law where the insured is domiciled will govern.
Commito noted the Mayo case was also noteworthy because the court ruled that death benefit proceeds be distributed to the estate of a deceased employee, rather than void the contract and return premiums paid-the traditional remedy in instances involving an absence of insurable interest.
The speakers said the insurance industry is still grappling with one outgrowth of much-publicized violations of state insurable interest laws: The employee notice and consent provisions of the Pension Reform Act of 2006. Still to be determined, observed Leimberg, is whether the provisions apply in cases involving 1035 exchanges, sole proprietorships, family attribution rules and irrevocable life insurance trusts used to fund cross-purchase buy-sell agreements.