Appendix B: Recent developments.
Re: Life Insurance Transactions
1. Does a valid "insurable interest" exist i n the described transactions under the New York Insurance Law?
2. Would the below-described transaction s (and, in particular, the put provision assignment) be permissible under the New York Insurance Law, especially N.Y. Ins. Law [section] 3205(b)(1)?
1. No, a valid "insurable interest" does not exist in the transactions described.
2. No, the below-described transactions are not permissible under the New York Insurance Law.
The inquirer's inquiry seeks the Department's views regarding certain transactions involving life insurance policies. The transactions In question are essentially/ structured as follows.
Third party banks ("Loan Providers") propose to loan money to high net worth individuals ("Clients") to purchase insurance policies ("Policies") from life insurance companies and pay premiums due under an option agreement ("Put Option") to sell such Policy to a third party on a predetermined date ("Exercise Date"), which will be at least two years from the date of the loan. The full recourse loans ("Loans") provided to the Clients by the Loan Providers would mature on a date on or after the Exercise Date and be secured by the Policies and by the rights of the Clients under the Put Option. In the event that the Client dies before the maturity (or repayment, as described below) of the Loan, the Loan would be repaid out of the Policy's death benefit, with the remainder paid to the beneficiary of the Policy or the Client's estate.
Under the Put Option, the put provider, a hedge fund ("Put Option Provider"), would commit to purchase the Policy from the Client (if the Client so requests) on the Exercise Date. The exercise price of the Put Option would be equal to a predetermined formula, the sum of which would cover the repayment of the Loan by the Client, as well as Loan interest. However, if the Client elects not to exercise the Put Option, he or she would be fully liable for repayment of the Loan (and interest thereon) and would continue to be the owner of the Policy (and responsible for future premiums under the Policy). In such a case, the Put Option would lapse unexercised and the Put Option Provider's rights would terminate. The Policy would be assigned to the Put Option Provider (at the earliest two years from contracting) only if the Client exercises the Put Option.
In summary, should the Put Option expire unexercised, the Client would be responsible for annual interest payments on the Loan following the Exercise Date. Should the Put Option be exercised, the Client would be responsible to repay the Loan amount plus interest on or about the Exercise Date (upon receiving the exercise price of the Put Option). No payments under the Loan would be due prior to the Exercise Date.
In addition to the above, a licensed bank ("Guarantee Provider") would, for a fee paid by the Put Option Provider, provide to the Client a guarantee ("Guarantee"), whereby it would guarantee the obligations of the Put Option Provider towards the Client under the Put Option. Thus, should the Put Option Provider not be able to meet its obligations under the Put Option, the Guarantee Provider would assume all obligations and benefits of the Put Option Provider under the Put Option (if exercised by the Client). The Guarantee Provider and the Put Option Provider would regulate their internal relations under a separate agreement.
The provision of the New York Insurance Law governing the issue raised herein is N.Y. Ins. Law [section] 3205(b), which provides, in pertinent part, as follows:
(b) (1) Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.
(2) No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured.
N.Y. Ins. Law [section] 3205(b) (McKinney Supp. 2005).
The term "insurable interest" is in turn defined under the New York Insurance Law as follows:
(1) The term, "insurable interest" means:
(A) in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection;
(B) in the case of other persons, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured.
N.Y. Ins. Law [section] 3205(a)(1) (McKinney Supp. 2005).
The Department has been presented in the past with proposals similar to the one herein. Although it is not expressly stated in the inquirer's description, based on our review of the transaction it appears that the arrangement is intended to facilitate the procurement of policies solely for resale. It is our view that a plan of this nature does not conform to the requirements of the New York Insurance Law. First, the policies obtained by the Clients herein are arguably not obtained "on [their] own initiative" as required by N.Y. Ins. Law [section] 3205(b)(1). Secondly, the potential transferees do not appear to have a legitimate "insurable interest" in the lives of the Clients.
While it is true that N.Y. Ins. Law [section] 3205(b)(1) expressly allows an individual to procure and immediately transfer or assign to another a policy on his own life, irrespective of the existence of an insurable interest in the assignee [a position upheld by Hota v. Camaj, 750 N.Y.S. 2d 119 (2nd Dept 2002), which the inquirer cites in the inquirer's letter] it is the Department's view that the transaction presented involves the procurement of insurance solely as a speculative investment for the ultimate benefit of a disinterested third party. Such activity is readily distinguishable from the facts underlying Hota (1), and is contrary to the long established public policy against "gaming" through life insurance purchases.
In addition, there may exist other potential problems, such as rebating violations, with the proposed transaction. Although not set forth in the inquirer's letter, it is foreseeable that some entity will be responsible for coordinating the plan and perhaps matching the Loan Providers, Put Providers, and Clients. Upon the sale of the Policy by a Client (following the exercise of the Put Option) it is conceivable that the policy premiums would be effectively rebated since the Client may well recoup from the proceeds of the Policy sale the amounts it borrowed and paid as policy premiums. Such a Client would thus receive cost free coverage for the two-year incontestability period, arguably an inducement to enter into the transaction.
In light of the above, the Department does not view the transaction as permissible.
For further information one may contact Supervising Attorney Michael Campanelli at the New York City office.
05-12-15 |Life Insurance Transactions | 12/19/2005
Bulletin 2006-3 (Utah)
To: All Life Insurance Companies, Life Insurance Producers, and Viatical Settlement Providers Authorized to do Business in Utah
From: D. Kent Michie, Utah Insurance Commissioner
Date: July 10, 2006 http://www.insurance.utah.gov/bulletin/2006-3.htm
Subject: Insurable Interest and Life Insurance
The purpose of this Bulletin is to remind licensees of the insurable interest requirement as it pertains to life insurance.
The Utah Insurance Department has received several inquiries regarding the legality of a life insurance transaction that involves the purchase of a life insurance policy, premium financing through a non-recourse loan, the sale of the policy in the secondary market, and a payment to the applicant.
The department's position regarding these life insurance transactions is that they are not compliant with the insurable interest requirement of this state. As stated in Utah Code Annotated (U.C.A.) 31A-21-104(1)(b), "[a] person may not knowingly procure, directly, by assignment, or otherwise, an interest in the proceeds of an insurance policy unless that person has or expects to have an insurable interest in the subject of the insurance." Insurable interest for persons other than those closely related by blood or by law, means "a lawful and substantial interest in having the life, health, and bodily safety of the person insured continue." U.C.A. 31A-21-104(2)(a)(i)(B).
To determine if an insurable interest exists, the department will look at the entire transaction and will not limit its review to only that part of the transaction that relates to applying for the life insurance policy. Regarding the transactions that have been described to us, a third party initiates, arranges the transaction, and ultimately expects to receive the proceeds of the insurance policy. The third party has no insurable interest in the person insured because a lawful and substantial interest does not exist in having the life of the insured continue; in fact, there is a substantial interest in not having the life of the person continue.
The business of viatical settlements (which includes life settlements) has been regulated by the Utah Insurance Department since 2003. We are fully aware that the citizens of Utah may benefit from having the opportunity to sell a life insurance policy that is no longer needed. All viatical settlements must be compliant with the Insurance Code and the described transactions are not compliant. All licensees are encouraged to review 31A-21-104 (Insurable Interest and Consent) and Title 31A, Chapter 36 (Viatical Settlements Act) and to conduct business in accordance with the Insurance Code.
DATED this 10th day of July 2006.
D. Kent Michie
BULLETIN NO. 06.-05
To: All Life Insurers Regulated by the Louisiana Department of Insurance
From: James J. Donelon, Commissioner
Re: Authorized and Unauthorized Questions for Use on a Life Insurance Application
Date: September 5, 2006
As Commissioner of Insurance I hereby issue Bulletin 06-05 pertaining to life insurer underwriting practices in Louisiana. In furtherance of the proper administration of life insurance that falls under the jurisdiction of the Louisiana Insurance Code, and in furtherance of my authority to issue Bulletin 06-05, I specifically reference the following sections of the Louisiana Insurance Code, including, but not limited to: LSA R.S. 22:195; 22:613; 22:620; 22:642; 22:652; and 22:1214.
It has come to my attention that in the premium finance arena some investors, seeking to own policies insuring the lives of those in whom the investors lack an insurable interest, have begun to initiate the creation of life insurance policies for the purpose of settlement in contravention of controlling Louisiana law. In particular, such an improper initiation can be detected by, in the first two years of the policy, the payment of consideration (other than the amount loaned to take out and sustain coverage) in order to induce the insured to take out a life insurance policy and/or an agreement between the insured and a particular investor to sell the life insurance policy at some point in the future. These arrangements are also sometimes characterized by an investor or lender, contemporaneous with the initiation of the life insurance policy, taking an interest in the death benefit above and beyond the repayment of principal and interest.
Such arrangements may, depending on the facts, violate some or all of the following Louisiana Insurance Code provisions, or other Louisiana statutes or jurisprudence, including, but not limited to: insurable interest; prohibition on wager policies; rebating; prohibition on "wet ink" life settlements; premium finance; and usury. Sound life insurance underwriting will seek to apply these principles.
Bulletin No. 06-05 September 5, 2006 Page 2
As a result of these arrangements certain practices regarding premium financing of life insurance policies have become a focal point of insurance underwriting, including application questions and decisions on whether or not to issue a life insurance policy. Life insurers have an obligation to ensure that an application does not violate the applicable provisions of the Louisiana Insurance Code, and life insurers can and should seek to ascertain whether life insurance applications are legally sound.
However, life insurance underwriting may not discriminate against applicants for life insurance based solely on the intention of the insured to subsequently sell the life insurance policy to a life settlement company or on the method of payment utilized by the insured to pay the premium. I find that such an underwriting decision would be a violation of the Louisiana Insurance Code. I further find that the following questions are the type that would be a form of unfair discrimination and shall not be approved for use in a Louisiana life insurance application and are not authorized for use in Louisiana, to wit: questions that inquire about the intention of the applicant to premium finance the policy; questions that inquire about the intention of the applicant to use the policy as collateral for a loan; questions that inquire about whether the applicant has previously converted a life insurance policy via the life settlement provisions; or, questions which inquire about whether the applicant is cognizant that he is vested with a property right to settle a life insurance policy in the future.
Recognizing the importance of this matter to both life insurers and insureds, I hereby advise that there are certain legitimate questions that are appropriate for use in Louisiana with regard to a life insurance application and life insurance underwriting. Those questions that are appropriate for use in Louisiana include: questions that inquire about whether the applicant has been offered a cash advance or other consideration as inducement to purchase the life insurance policy; questions that inquire about whether the applicant has been offered "free insurance"; questions that inquire about whether the applicant has entered into a finance arrangement which arranges a life settlement with a particular investor; questions that inquire about whether the applicant has entered into a finance arrangement that entitles a lender or investor to a portion of the death benefit above and beyond the repayment of principal and interest on the loan; or questions that inquire about the total amount of life insurance the applicant currently has in force.
If you have any questions regarding Bulletin 06-05 please contact Ms. Beth O'Quin, Assistant Director of Life and Annuity Policy Forms, at 225-342-6990 or by e-mail at boquin@!di.state.la.us.
Baton Rouge, Louisiana this 5th day of September 2006.
(1) In Hota, the court noted that the assignee of the policy did in fact possess an insurable interest in the life of the decedent by virtue of the fact that the assignee therein was a creditor of the decedent. In the proposed transaction, the Loan Providers will be the creditors of the Clients, but the indebtedness exists only in connection with the purchase of the insurance. Thus, theirs is" ... an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured" under N.Y. Ins. Law [section] 3205 (a)(1)(B).
STOLI LITIGATION SUMMARY Name: Plaintiff Defendant 1 Schoenthal American General Schoenthal Family LLC; Life Ins Co. Liberty One Funding Trust 2 Kramer Alice Kramer/ Lockwood Pension Estate of Arthur Services Inc, Tall Tree Kramer Advisors, Life Products Clearing, Transamerica Occienetal Life Insurance Co, Phoenix Life Ins Co., Lincoln Life 3 Lobel Life Product Linda Angel/Estate of Clearing Lobel 4 Fishman Lincoln National Gordon R A Fishman ILIT, Life Insurance Co. Harvey Schwitzer, MCC 5 Antonello American General Michael J Antonello, Life Insurance Co. Thomas M Petracek, MN Estate Services 6 Paulson/ Sun Life Assurance John R Paulson, Atticus Sun Life Co. of Canada Fund, Coventry First, Orca Finance Trust, Antonello, Petracek 7 Paulson/ AXA Equitable Life John R Paulson, David AXA/ Ins Co. and MONY Dahl, Coventry, et. al MONY 8 Liberte v Liberte Capital James A Capwill Capwill Group 9 Wuliger William T Wuliger Manufacturers Life Insurance Co. 10 Steinmetz Senior Settlements Growth Trust Fund LLC 11 New York Life Ins Pinchus Menche,Trustee and Annuity Corp. of Deutsch ILIT 12 Larry King Larry King Alan Meltzer 13 Broffman American General David Doten et al Trust Life Ins Co. 14 Kueltzo Mutual Credit Louis Kueltzo Corp. et. al 15 Ingrid Spurling Group, Kuykendall, Mutual Credit Irmgard Corp. Marra 16 American David Doten, Della General Life Broffman, Spurling Group, LLC, Mutual Credit Corp. Agent/ Name: Agents Citation/Docket # Date Filed 1 Schoenthal Amy 2008 U.S. Dist. 1/15/2008 Homewood LEXIS 2973 1:06-cv-0695-WSD 2 Kramer Steve 1:08-cv-02429-UA 3/10/2008 Lockwood 3 Lobel 2008 U.S. Dist. 1/22/2008 LEXIS 4233 530 F Supp 2d 646 07 Civ. 475 (DC) 1:07cv00475 4 Fishman Kevin Burke EDCV07-1338 5:2007cv01338 5 Antonello Antonello 4/26/2007 6 Paulson/ Antonello 2008 U.S. Dist. 2/15/2008 Sun Life LEXIS 11719 07cv3877 7 Paulson/ Antonello 2007 U.S. Dist. 9/4/2007 AXA/ LEXIS 81198 Civil MONY No. 06-341 (DSD/ SRN) 06cv341 8 Liberte v 229 F. Supp 2d 799 11/7/2002 Capwill 5:99cv818 9 Wuliger 2008 U.S. Dist. 2/11/2008 LEXIS 9809 Case No 3:03 CV 7457 10 Steinmetz 2008 U.S. Dist. 2/27/2008 LEXIS 15639 05cv777 11 Index no. 602379106 7/5/2006 12 Larry King Alan 07cv06813 10/27/2007 Meltzer NFP 13 Broffman 07cv00263 Trust 14 Kueltzo 07cc07923 15 Ingrid Kuykendall, Irmgard Marra 16 American S. Lesher General Life Name: Court Matter 1 Schoenthal North. District GA, Financing Atlanta Div. program mistated applicant's worth purpose for insruance 2 Kramer Southern District Simlar to NY Lobel 3 Lobel Southern District Settlement NY co. and family litigating; family wants proceeds; agent and client fraud 4 Fishman Central District CA Recission based on fruad 5 Antonello District of MN Agent fraud 6 Paulson/ District of MN Agent fraud Sun Life 7 Paulson/ District of MN AXA/ MONY 8 Liberte v Northern District Viatical Capwill OH company fraud- diversion of investor funds 9 Wuliger Northern District Investor seeks OH, West. Div. recission and return of premiums- court sides w/plaintiff 10 Steinmetz District of NJ Did valid contract exist 11 Supreme Court NYLIAC NYS, County of NY seeks recission- violate ins int law 12 Larry King Central District CA Breach of fiduciary duty 13 Broffman Central District CA Dismissed Trust due to jurisdictional problems 14 Kueltzo Superior Court CA, Orange County 15 Ingrid Kuykendall, Irmgard Marra 16 American General Life Name: Status 1 Schoenthal Summary Judgement for AIG 2 Kramer 3 Lobel 4 Fishman 5 Antonello 6 Paulson/ Sun Life 7 Paulson/ AXA/ MONY 8 Liberte v Capwill 9 Wuliger 10 Steinmetz 11 12 Larry King 13 Broffman Trust 14 Kueltzo 15 Ingrid Kuykendall, Irmgard Marra 16 American General Life
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|Publication:||Tools & Techniques of Life Settlement Planning|
|Date:||Jan 1, 2008|
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