The Securities and Exchange Commission, in adopting Rule 151A, may have clarified the status of index annuities, but it also made the status of index life insurance more uncertain than ever.

Indeed, the commission’s Adopting Release does not even acknowledge index life insurance, but seems to lump it with all other “life insurance.” Then, the commission articulates two seemingly contradictory frameworks for the analysis of life insurance under Section 3(a)(8).

The commission release adopting Rule 151A includes 3 statements that are notable in exploring where index life insurance stands, post-Rule 151A. In sum, the quotes add up to a guiding principle and oft quoted anonymous imperative: Do as I say, not as I do. The challenge then is: What did the commission say, what did it do, and what do issuers and sellers do?

First, the Adopting Release celebrates the benefits of Rule 151A in clarifying the status of index annuities, as follows:

It will bring about clarity in what has been an uncertain area of law. In addition, issuers and sellers of these products will no longer be subject to uncertainty and litigation risk with respect to the laws that are applicable.”

Then the release says that the analysis of life insurance under Section 3(a)(8) depends on both the factors articulated by the Supreme Court and the commission and the unique basis for Rule 151A:

The rule will not apply to contracts that are regulated under state insurance law as life insurance, health insurance, or any form of insurance other than an annuity…Thus, rule 151A itself will not apply to indexed life insurance policies, in which the cash value of the policy is credited with a guaranteed minimum return and a securities-linked return. The status of an indexed life insurance policy under the federal securities laws will continue to be a facts and circumstances determination, undertaken by reference to the factors and analysis that have been articulated by the Supreme Court and the Commission. We note, however, that the considerations that form the basis for rule 151A are also relevant in analyzing indexed life insurance because indexed life insurance and indexed annuities share certain features (e.g., securities-linked returns).”

Finally, the release states with regard to annuity contracts, including index annuity contracts, the following:

“The rule, however, does not provide a safe harbor under Section 3(a)(8) for any other annuities, including any other indexed annuities. The status under the Securities Act of any annuity, other than an annuity that is determined under rule 151A to be not an “annuity contract” or “optional annuity contract,” continues to be determined by reference to the investment risk and marketing tests articulated in existing case law under Section 3(a)(8) and, to the extent applicable, the Commission’s safe harbor rule 151.”

Regarding the first quote, the release does for index life insurance the exact opposite of what Rule 151A purports to do for index annuities. It perpetuates and, in fact, increases the lack of clarity in the equally uncertain area of the law as applied to life insurance as well as litigation risk.

The major source of the increased uncertainty arises from the disparate analysis set down for index annuities and index life insurance, both of which fall outside of the Rule’s scope.

The second quote says that the status of index life will continue to be a facts and circumstances determination “undertaken by reference to the factors and analysis that have been articulated by the Supreme Court and the Commission.” The factors and analysis have decidedly not included the “more like than not” standard that forms the basis for Rule 151A. This guidance, however, is followed by the anomalous statement “that the considerations that form the basis for Rule 151A are also relevant in analyzing indexed life insurance.”

Does that mean, notwithstanding anything else, such as the Supreme Court and the commission views, if a purchaser can get more than what was guaranteed, be it cash value or death benefit, the life policy is caught in the “more likely” net?

Given the commission’s denigration of guarantees under Rule 151A, is the guarantee of a death benefit several times the amount of premium paid trumped by the possibility of an additional interest rate credit derived from an index? Is the mortality risk and investment risk of that guarantee of no import?

Reconciling these two analytical frameworks is in itself daunting. But add to that the disparate frameworks in the commission’s statement regarding the status of index annuities that fall outside the rule–i.e., the status “continues to be determined by reference to the investment risk and marketing tests articulated in existing case law under Section 3(a)(8) and, to the extent applicable, the Commission’s safe harbor rule 151.”

Do these disparate frameworks reflect an inadvertent acknowledgment that “but for” the “more likely than not” definition in Rule 151A, the traditional factors and analysis would produce very different status results for many index annuities?

Joan E. Boros, Esq., is of counsel with Jorden Burt LLP, Washington, D.C. Her e-mail address is JEB@jordenusa.com