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Regulators Start To Consider Model Allowing Larger Policy Loans

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Regulators will begin technical work necessary for consideration of a model that would offer guidance on policy loan programs associated with life insurance contracts.

The unanimous motion to begin work was made during a conference call of the Life & Annuities “A” Committee of the National Association of Insurance Commissioners, Kansas City, Mo.

The decision follows a notification to the Kansas insurance department from an insurer indicating its intention to implement a policy loan program, according to a July 11 memorandum from Sandy Praeger, Kansas insurance commissioner and NAIC president-elect. The memo to Julie McPeak, Kentucky executive director of insurance and “A” Committee chair, did not identify the insurance company.

The memo notes that “from this company’s perspective, this program provides the policy owner an alternative to a viatical settlement. This program, as described in the letter, would allow in-force policy owners, who meet certain underwriting criteria, to borrow against the death benefit of a policy.

“The underwriting criteria would identify insureds whose life expectancy has changed significantly due to health conditions that have developed since the policy was originally issued.”

The memo cites “advantages” in the proposal including the fact that “the policy owner receives similar if not the same benefits offered by the viatical company (i.e., cash in an amount that exceeds the cash surrender value of the policy and the elimination of payment of any future premiums.) However, an additional advantage to the policy owner of this program is that the policy owner continues to remain the owner of the contract and does not sell any of his/her rights under the contract. Upon the death of the insured, any death benefit in excess of the policy loan amount is still paid to the beneficiary and not a viatical company. All insurable interest remains in effect.”

The Kansas department, according to the memo, determined that such a program would currently violate Kansas statutes because currently insurers cannot offer a loan that exceeds the policy’s cash surrender value. Other states have similar statutes, according to Praeger’s memo. But, her memo also notes, the proposal also appears to be “good public policy.”

Consequently, the “A” Committee agreed to have the Life & Health Actuarial Task Force look at reserving and underwriting standards and statutory accounting working groups may also be asked to weigh in on the feasibility of developing such a model.

Following the call, Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., said the proposal from the insurance company seems to contravene the just adopted Viatical Settlement model act and that the model needs to be revisited.


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