My Apology for neglecting you.

Hi All,

My wife has been seriously ill. Life and death ill and I have been distracted. I will get back to commenting on the Life Insurance and Life Settlement questions you have. Again please accept my apology for neglecting you. Thanks, Holger

The information in this post should serve as a guide for discussion with your insurance professional.

Life Settlement Model Act passed by NAIC

The National Association of Insurance Commissioners (NAIC) has passed a Model Act to be used by its members. The act makes changes that update the recommendations for state regulations to deal with the new realm of Life Settlements. See the discussion on What is Life Settlement. Some, all or even none of the recommendation could become law in your state, but it is worth knowing what your commissioners are thinking and what they feel is important. My opinions are in red print.

One of the key features to come from the act is the requirement to provide more transparency in the transaction. Many of the institutional and corporate purchasers already abide by these requirements. These requirements, if enacted, would provide for:

1) Numerous disclosures to include: the Broker represents the owner exclusively and has a fiduciary responsible to you; options in your contract for acceleration of your death benefit; some of the proceeds of the sale may be taxable, subject to claims and adversely effect your government benefits; notification of the owners right to rescission; funds will be dispersed within 3 days of receipt of the policy by the new owners; and that you may be contacted to check on your health. (these are all common contract issues, nothing new here but good to know)

2) A full, complete and accurate description of all offers, counter-offers, acceptances and rejections relating to the proposed settlement contract. (these will really let you know how hard your broker has worked for you and give you a very good feel of the market value of your policy)

3) Info on how your broker is compensated and if your offer is reduced to compensate your broker. (honest and full disclosure on your broker's part, BUT it does not tell you how much money the new owners expect to make; their "rate of return", the big money is really made by the new owners)

4) If your policy is sold or transferred after you sell it, you will be notified within 20 days. (not that you can do anything about it, but you should know if someone has an interest in your death)

Another key feature and perhaps most controversial is the prohibition of selling a policy that is less than five years old, if it exhibits the hallmark of Stranger Originated Life Insurance (STOLI). In my opinion, this is an affront to the understanding that an owner of a life insurance policy has certain property rights, but it also points out that life insurance is to protect an actual need not to make a profit. The other news is that if these regulations are adopted in the various states, there are still some exceptions to the five year prohibition. The exceptions are:

1) The five year clock starts on the date the policy, if converted, is first issued, not the conversion date.
2) The owner or insured is terminally or chronically ill.
3) The owner's spouse dies or they divorce.
4) The owner retires from full-time employment.
5) The owner becomes physically or mentally disabled and a physician determines that the disability prevents the owner from maintaining full-time employment.
6) The owner is bankrupt.
7) The owner may have other rights to sell as detailed in his state regulations.



The information in this post should serve as a guide for discussion with your insurance professional.

What are the property rights of my insurance policy?

Another "get it right" article.

A life insurance contract is property. Yes, just like your house, car or other chattel. The contract has 3 parties: the insured, the insurer and the policyowner.

In most instances the owner(applicant) of the policy is the insured. However for many and various reasons it might be better for the owner to be a third party. One very important consideration of a third party ownership is that the value of the policy will not be included in the estate of the insured. So if you have a large estate and are concerned with estate tax consequences, this can be a great benefit in reducing a tax burden.

What can the policyowner do? The first right the owner has, and arguably the most important, is to name the person or entity to receive the proceeds of the policy in the event of the death of the insured: the beneficiary. But this may come as a surprise and maybe even a bit ghoulish, as the owner can reach back from the grave and determine how the proceeds can be disbursed. The owner can choose to have it paid in a lump sum or over time at certain rate or as is the case most often, let the beneficiary decide.

A more mundane right the owner has is to determine, in concert with the insurer the schedule that the premiums will be paid. As an example, the policyowner may contract for payments annually, but determines that this is inconvenient or even a hardship. In this case, the owner might change to monthly, quarterly, semiannually or even suspend premium payment (see below: cash value).

The owner also determines what is done with any cash value accumulated or dividends paid. This might include loaning yourself money, paying premium, taking the cash out, etc.

The policyowner has the right to assign the policy. Meaning, if the owner gets a loan he could assign, that is transfer the rights of the policy to lender. When the loan is repaid the assignment of the policy would end and the rights return to the original owner. Assigning can also be permanent and irrevocable, called an absolute assignment. The owner might do this to give a gift or transfer ownership from the estate. This right may be the most powerful that the owner has, as it opens the realm of the secondary market, see my article on Life Settlements. The laws and requirements for the ownership change are complex and require specific steps. The absolute assignment may even cause tax consequences, so get legal and tax advice.

Amendments, endorsements and riders can only be approved by the owner and are usually added at the owner's request by the insurer. These are added after a policy contract is issued, and as might be expected must be agreed upon by both the owner and the insurer.


The information in this post should serve as a guide for discussion with your insurance professional.

Minnesota AG Swanson Takes on the "Big Boys"

I really wish my industry would do a better job of policing ourselves, in that vein this is a sorrowful post to write. Lori Swanson, the Attorney General of the State of Minnesota, has begun to make a name for herself in the insurance industry. Within a week of her inauguration she filed suit against Allianz Life and last week against American Equity Life. In the interest of full disclosure, I will be biased for Ms. Swanson, as I have never sold any of what are characterized as "two tiered" annuities, just for the reasons she sued the carriers involved.

A two tiered annuity is annuity that requires a payment stream to get at your savings. Annuities should not be considered investments in the same way as stocks or bonds are, but should more properly be considered "savings". They are savings because of the expectations of consistent growth, access and safety. Even what are called "Equity Indexed(EIA)" or "Fixed Indexed(FIA)" annuities are not an investment in the stock market or any other market. There is no risk of loss in a fixed annuity product, which is what makes them ideal for someone saving for retirement.

The concern, and in my opinion rightly so, is that the expectations listed above are not all met and the agent did not do a good job of ensuring that the annuity was suitable for the senior involved. There are often many incentives and marketing ploys used to get the attention of seniors. One that both Allianz and American Equity did is a large "upfront" bonus, some as high as 15% immediately added to your principal. Those bonuses sound great, but what the large print giveth the small print often taketh. The catch is you can't get at those "upfront" bonuses in one lump sum, EVER, you must annuitize; that is take a payment stream.

Buyer beware is a solid mantra, but when a company or its agents design a product that can so easily mislead, they are not, in my opinion, meeting their fiduciary responsibility.

What will happen from all this legal wrangling, you may ask? Most likely the State of Minnesota will either win a judgment, as the facts of the case seem correct, or the companies will settle. This should then continue the trend of more consumer friendly "Equity or Fixed Indexed Annuity" designs.

I say continue the trend, because in 2005 the National Association of Securities Dealers(NASD) issued Members Notice 05-50, which has had the effect of forcing the insurance companies to design more consumer friendly annuities, so that they could be marketed by Registered Securities Representatives. The Securities Dealers are very wary of running afoul of the spirit of the NASD's notices, even though the EIA' or FIA's are not controlled by the NASD, the dealers are. The NASD takes fiduciary responsibility very seriously and no Securities Rep or Dealer wants to have his authority to sell securities removed. Which is good for my readers and all those interested in "getting it right."

The information in this post should serve as a guide for discussion with your insurance professional.

I have a death claim but never heard of the company.

Let's say a loved one is recently deceased and as you are closing out the affairs you come across a life insurance policy from a company you do not recognize. How do you make a claim? Who do you call? Where do you go? Relax, no valid insurance death benefit has ever gone unpaid. Even if a company goes out business or is shut down another carrier will assume the obligations. The reason is twofold: first, it maintains the integrity of the insurance system (no insurer wants to reduce the public trust in the life insurance industry); secondly, it is an ongoing stream of income with out much outlay, see my article "The Business of Insurance" to see why.

As I stated in my article "Will the Leaches Never Stop...", the insurance company will wait on the proper notification from you to pay a claim. "Alright already", you say "how do I give the notification if I never heard of the company or the name has changed or it has a new unknown owner?"

First thing to do is check the policy's title page. This page usually has the issuing company's name and contact info. Normally, you just call the number on the title page and ask the customer service representative to send you the required forms. Even if the company was purchased recently, the new owner will have an automatic call forwarding or instructions on how to contact them. Problem solved, but you would not be reading this if it were that easy.

If that does not work, you must do some more investigation. The first place to start is to try to find the agent that sold the policy. Do this by digging into the policy. The application is usually part of the contract and the agent is listed. The initial application is usually in the back of the policy and may have the agent's phone number or address. Call or visit if the agent is still in business. The agent will be happy to help you locate the proper forms to file the death claim as they probably have the low down on the companies successor.

Agent not in business or can't find him or her? Now it is time to call in the big guns, as we used to say in the Army. The big gun is the Internet. Do a "web search" for the carriers name. You may be able to find a listing of the company's new owner or those that have assumed the obligations of the carrier. Good luck!!

The biggest gun is your state's insurance department. This link to the "Insurance Departments" will take you your states website. Once at the site you usually have two options that are fruitful. The first is to check the companies authorized in your state, as their contact information is listed. But for a carrier that was sold or renamed from the policy you have, that may not work. Then go to the contact page of the consumer division and call them for the information.

You may ask, why not go to the insurance department first? Well if the answer you need is at hand, that is on the policy or with agent, you save time and hassle. When you call the state insurance department for info, they are usually understaffed and may take some time to get back to you.

The information in this post should serve as a guide for discussion with your insurance professional.

Presenting The Cavalcade of Risk #24

Buying and Selling Your Life Insurance is proud to announce that our article, The Business of Insurance, has been selected for "The Cavalcade of Risk #24". This achievement for a new site to be included with so many other fine authors is testimony to the quality of our articles and the timeliness and accuracy of the information provided. Please click on their link above and check out the high quality of the articles chosen.

The information in this post should serve as a guide for discussion with your insurance professional.

What is a Life Settlement?

I have seen many sites for Life Settlements but none explaining the basics. A Life Settlement or a Senior Settlement, as it sometimes called, is, in most states, a highly regulated sale of a life insurance policy by the owner to a 3rd party. Remember a life insurance policy is a legal property and the owner may do as he wishes with that property.

The 3rd party is usually a corporation or institutional investor of some sort. A large amount of money comes from European pension funds, but hedge funds and sometimes even other insurance companies purchase life insurance policies on the open market. Each of these "money groups" needs to know only two things to determine if they will offer on your policy.

The first thing that is needed is your Life Expectancy(LE). Life Expectancy is a function of both your age and your health. This number, usually expressed in months, is supplied with a median number of months and the 85% number of months. Basically, at median half of the people with your LE would have passed away and at 85%, 85% would have passed away. The Life Expectancy is usually figured using your medical records, thus it is personalized. An exam is not usually required.

The next piece of info needed is the premium to keep the policy in force to your life expectancy. Term policies will not be purchased as term insurance, they must be converted to a form of permanent insurance, usually at higher cost. This will allow the new owner to get a reasonable expectation of premium to keep the policy in force.

Once they have these two pieces of info it just boils down to math. Each of these money groups has their own investment objectives and if your policy fits they will make an offer. If it doesn't fit, they won't offer.

The statement that each "has their own investment objectives", should alert you to the need to present your case to as many money groups as possible. Look for future articles on that subject, so that you may "get it right".

The information in this post should serve as a guide for discussion with your insurance professional.