NAIFA Blog

Where Does NAIFA Stand on STOLI and Life Settlements?

The NAIFA Communications Committee recently brought it to our attention that the public, the media and some NAIFA members are uncertain where our association stands on the issues of stranger-originated life insurance (STOLI) and life settlement transactions. We took the question directly to Gary Sanders, NAIFA’s vice president of securities and state government relations and our staff expert on STOLI. The following Q&A resulted:

NAIFA Blog: First, let’s clear up a point that may confuse some people. NAIFA has been very active in state efforts to oppose STOLI, in which a life insurance policy is sold in a life settlement transaction and the ownership of the policy ends up with an investor who has no connection to the insured. Does this mean NAIFA opposes life settlements?

Gary: No, NAIFA does not oppose legitimate life settlements! But NAIFA does strongly oppose STOLI transactions.

NAIFA Blog: But a life settlement is part of a STOLI transaction, isn’t it? How can NAIFA oppose STOLI but not oppose life settlements?

Gary: Yes, a life settlement is a key part of many STOLI transactions. But the critical factor in terms of determining whether a settlement is a legitimate life settlement is whether the life insurance policy that is being settled was initially purchased for a legitimate insurance purpose.

NAIFA Blog: OK, but what do you mean when you say “a legitimate insurance purpose”?

Gary: Good question. The crucial factor is whether all the rules were followed from the start, including the existence of an insurable interest at the time the policy is issued. In a typical life settlement, the policy was purchased for its intended use—to protect family members or a small business from the risk of a premature death. But after the policy is purchased, something changes in the life of the policy owner which leads her to decide that the policy is no longer needed. This could be the death of the intended beneficiary, divorce or the need for immediate cash to due to an illness or other loss. In such cases, the policy owner may decide to sell the policy to a third party. NAIFA is NOT trying to enact laws that prevent or restrict such transactions where the policy was acquired in good faith.

NAIFA Blog: Got it. But how is STOLI different?

Gary: In a STOLI transaction, the sole purpose for purchasing the underlying insurance policy is to sell it to investors—who are strangers to the insured and do not have an insurable interest in the insured’s life—after the policy’s contestability period expires. STOLI transactions are a way to get around the requirement that someone can’t take out a policy on another person’s life unless the owner has an insurable interest in the insured.

NAIFA Blog: That makes sense, but can you explain exactly why NAIFA opposes STOLI?

Gary: STOLI transactions violate the essential social purpose of life insurance, which is protection. Life insurance developed as a means to protect families from the unexpected death of a breadwinner, or businesses from the financial consequences of the death of an owner or key employee. Life insurance was not intended to be used as a vehicle for financial speculation on human life. In effect, STOLI promotes wagering on human life. STOLI also could potentially expose consumers to unexpected taxes, loss of privacy, and inability to obtain needed life insurance in the future.

NAIFA Blog: So to summarize, NAIFA opposes STOLI but supports life settlements, right?

Gary: Not quite. NAIFA does oppose STOLI. But while we do not oppose legitimate life settlements, NAIFA’s policy is not one of general support for life settlements. Here’s what our formal policy says (it references viatical settlements, but for purposes of this discussion viatical settlements and life settlements are interchangeable):

“NAIFA realizes that viatical settlements, although a potential positive consumer issue, also possess potential for significant abuse if left unregulated. The viatical transaction has insurance characteristics, and is closely related to the business of insurance. Inasmuch as NAIFA has a long-standing policy of supporting the regulation of insurance by the states, NAIFA endorses the adoption by the individual states of the NAIC’s Viatical Settlements Model Act as the most appropriate approach for establishing standards and operating procedures for viatical and life settlements.”

In practical terms, NAIFA believes that a life settlement may be appropriate in instances where the insured has carefully evaluated her unique situation and circumstances and determined that the sale of the policy in the secondary market is in her best interests. NAIFA does oppose life settlements that are used to facilitate STOLI.

If anyone still has questions about STOLI or life settlements, feel free to post them as comments to this blog post and I’ll do my best to answer them.

State of the Union Address Signals Challenges for NAIFA Members

The following is excerpted from a NAIFA GovWatch issued Jan. 26, 2011.

On Tax Reform:

President Obama in his State of the Union called for lower corporate tax rates and fewer loopholes. Specifically, the President called for paying for tax reform by broadening the base through the elimination of tax expenditures that are currently a part of the Internal Revenue Code. Life insurance and annuity inside buildup, retirement savings in pension plans, and employer-paid benefits are all characterized as “tax expenditures.”

NAIFA will continue to explain how current tax rules governing life insurance, annuities and employer-provided benefits promote individual and family financial security and to urge the continuation of incentives designed to encourage people to tie up funds for long term financial security.

On Health Care:

While the President defended the new health care law against Republican repeal efforts, he signaled a willingness to make some changes beginning with the expanded 1099 reporting requirement.

NAIFA’s health reform goals have been and continue to be ensuring affordable coverage for all Americans. NAIFA supports bipartisan targeted revisions to improve affordability and sustainability of private insurance choices, and to ensure consumers have access to professional services provided by licensed and regulated insurance agents.

Moving Forward:

The priorities described by the President are expected to be fleshed out in greater detail in his fiscal year 2012 budget proposal, which will be released around Feb. 14. Watch the NAIFA Blog, our website and GovCommunications for future developments.

 

 

NAIFA CEO Susan Waters Named to "Insurance Dream Team"

NAIFA CEO Dr. Susan Waters is one of the “Top 100 Most Powerful People in the Insurance Industry,” according to Insurance Broadcasting and the Insurance Media Association. The groups describe the list as the “insurance dream team” and say it consists of the “100 people connected to the insurance industry in the U.S. [you would] put in a room to effect an outcome related to insurance.” Others joining Susan in the top 100 include: Warren Buffet; Theodore A. Mathas, chairman, president and CEO of New York Life; John E. Schlifske, chairman and CEO of Northwestern Mutual; Sen. Chris Dodd (D-CT); Rep. Spencer Bachus (R-AL); Laurence Barton, president & CEO, The American College; and Marvin H. Feldman, president and CEO, LIFE Foundation.

The honor recognizes Susan’s hard work and success but also reflects NAIFA’s prestige and influence within the industry. Other NAIFA staff and leaders have been recognized for their impact on the life insurance and financial services industries:

• NAIFA President Terry K. Headley was named one of InvestmentNews’s “20 Most Powerful People of 2011.”
• NAIFA Senior Vice President for Government Relations Bill Anderson was elected vice president of the National Insurance Producer Registry (NIPR).
• Bill Anderson is also a member of the Industry Advisory Committee to IIPRC and on the board of the Insurance Industry Education Council for NCOIL.

NAIFA Releases Statement on SEC Study on Standard of Care

NAIFA President Terry Headley, LUTCF, LIC, FSS, issued the following statement on the Securities and Exchange Commission study recommending creation of a common fiduciary standard of care for broker-dealers and investment advisers:

“NAIFA is concerned about the possible adverse impact on middle- and lower-market investors if recommendations in the SEC study are carried out.

“NAIFA has previously expressed concerns similar to those raised by Commissioners Casey and Paredes in their January 21 statement that the SEC study does not ‘adequately recognize the risk that its recommendations could adversely impact investors.’

“NAIFA shares the commissioners' concerns that ‘the Study...does not appropriately account for the potential overall cost of the recommended regulatory actions for broker-dealers, investment advisers, and retail investors. The Study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive. Any such results are not in the best interests of investors; nor do they serve to protect them.’

“NAIFA’s fundamental concern is that the potential additional costs and increased potential for liability of applying a ‘one size fits all’ fiduciary standard of care to the broker-dealer business model could result in middle- and lower-market investors having less access to the account services and investment advice that are currently being delivered by registered representatives of broker-dealers.

“NAIFA also agrees with comments made by Commissioners Casey and Paredes in their January 21 statement indicating that the study fails to adequately justify or support the SEC staff recommendation that the SEC propose the adoption of a ‘new uniform fiduciary duty standard and harmonization of two disparate regulatory regimes.’“

More Information:

• National Underwriter's article on the SEC study quotes NAIFA President Terry K. Headley.

The President Promises Regulatory Relief

But Maybe We Shouldn't Hold Our Breath

Wow! The NAIFA Blog has even more influence than we realized. Just a few days after our post on the rising tide of regulation and how it’s affecting advisors, President Obama admitted in a Wall Street Journal op-ed that overregulation places “unreasonable burdens on business” and ordered a federal review of regulations to ensure that they actually protect the public and don’t harm the economy. Coincidence?

Well, yes, probably. But still, NAIFA applauds the president on his change in tone on the regulatory front and for pledging to “do more to account for—and reduce—the burdens regulations may place on small businesses” while getting “rid of absurd and unnecessary paperwork requirements that waste time and money.”

The words sound good, but actions matter. And many people are understandably skeptical that the federal government’s regulatory machine will be able to reign itself in. We're not so naive as to expect the president to come out against his own health care overhaul or financial reform any time soon (and the Journal reports it won't happen), but it would be nice to see action that really does reduce the regulatory burdens endured by small business owners, including insurance and financial advisors.

NAIFA Applauds GAO Approach: No Additional Layer of Regulation for Financial Planners is Warranted

The National Association of Insurance and Financial Advisors’ President Terry Headley, LUTCF, LIC, FSS, issued the following statement on the GAO report that examined oversight of financial planners. The report was mandated by The Dodd-Frank Wall Street Reform and Consumer Protection Act:

“NAIFA agrees with the main conclusion of the Government Accountability Office’s Consumer Finance Report that no additional layers of regulation for financial planning are required.

“We agree with the GAO’s findings that existing state and federal regulations already cover the vast majority of the services provided by  financial planners, which include preparing financial plans and providing insurance products, securities, and other investments. Compliance with these regulations takes a large portion of insurance and financial advisors’ time and resources. Any additional layers of regulation would not only be unnecessary, but could also hinder the ability of advisors to effectively serve consumers.”
 
The GAO also found that consumers may not understand the significance of many titles and professional designations that financial planners hold, and asked the Securities and Exchange Commission to study the matter further.
 
“NAIFA strongly opposes anyone using professional designations or certifications in a manner that would  mislead investors. Should the SEC heed the advice of the GAO report to look into this matter further, we hope the commission will consider an approach consistent with the NAIC and NASAA model regulations on the use of senior-specific certifications and professional designations. These models expressly prohibit the use of any designation or certification that is nonexistent, has not been earned or misleadingly inflates the knowledge or expertise of the person holding it.”

Too Much of a Good Thing

Regulations are a fact of life in the insurance and financial services industries. And that’s not a bad thing. We need rules to protect consumers from the bad apples who make up a portion (however small it may be) of any profession. We need rules to ensure a level playing field and define some of the gray areas for honest advisors. We need rules to protect the integrity of our industry and provide peace of mind to clients, who in some cases entrust their life savings to our care.

Then again, we need water to survive, but give us too much of it and we’ll drown.

So it is with regulation. As it stands, insurance and financial advisors are struggling to keep their heads above the surface in a sea of regulations. A 2010 survey of NAIFA members found that they and their staffs spend an average of 514 hours each year working on compliance, plus 12 additional hours that go toward preparing for regulatory exams. They spend an average of nearly $9,000 per year to comply with state and federal rules.

About 20% of those who at some point in their careers have been licensed for securities gave up their licenses, often citing the regulatory burden. One in five of currently licensed NAIFA members said that if compliance costs were to increase 15% they would likewise stop offering securities.

Yet increasing rules and regulations seems to be the wave of the future. U.S. Chamber of Commerce President and CEO Thomas J. Donohue recently cited a “regulatory tsunami” that threatens “the future of American enterprise.” He notes that the healthcare reform law “creates 159 new agencies, commissions, panels, and other bodies.” Meanwhile, the Dodd-Frank financial services act mandates 259 rulemakings by regulatory agencies and suggests 188 more. It also requires 63 reports and 59 studies, Donohue says.

Insurance and financial advisors provide crucial services for American consumers of nearly every income bracket. However, their job is getting tougher. Most NAIFA members are small business owners who work with clients from their own communities. It’s hard for them to run a stable business with regulations in constant flux and when a new wave of rules seems to hit every few months. The time and resources advisors spend on compliance cuts deeply into the time they can spend developing relationships and helping clients secure their financial futures. It also increases costs. In the end, overregulation hurts not only advisors, but also the very people the regulations are intended to protect — the American public.

Financial Advisors Are in Demand

Americans want help with their finances but are not sure where to turn, a recent survey by Allianz Life suggests. When the company asked consumers which type of professional service provider they would most like to use in 2011, the largest portion (44 percent) chose a financial professional. The next most popular answer — a personal trainer — received only 26 percent of the vote. In spite of this, a smaller number (33 percent) said they are actually likely to follow through and develop a financial plan during the year. The most common reason given by those who would like help but won’t seek it is that they don’t believe they make enough money to work with an advisor.

Fortunately, this is often not the case. A recent survey of NAIFA members found that main street investors — those with household incomes of less than $100,000 — form a solid core of these advisors’ clients. In fact, 58 percent of NAIFA members’ clients fall into this income group and 77 percent have household incomes of $149,000 or less.

We certainly hope Americans at all income levels are able to find the financial help they want and deserve in 2011. A searchable database of qualified agents is available on the NAIFA website.

Insurance agents' service: Beyond transactional

Today’s Politico article focuses on the shrinking commissions for insurance agents under federal health care reform, and quotes NAIC consumer advocate Tim Jost. Jost compares the role of health insurance brokers to that of travel agents 10 years ago, and implies that –- just like consumers’ dwindling need to purchase airline tickets from travel agents --  consumers no longer will need insurance agents to sell them policies when state exchanges come online in 2014.

We don’t buy this argument. For one thing, it assumes that agents are merely sales associates, which we know is not the case. Consider this: The purchase of an airline ticket to visit the NAIC Central Office in Kansas City involves a fairly simple transaction that provides you with a one-time benefit: to reach your destination. On the other hand, if - after purchasing a health plan -- you develop a serious medical condition (or even require routine medical care, for that matter), then you will require contact with multiple parties: care providers, billing agents, an insurer and perhaps government bureaucracies for weeks, months or even years.

The role of the agent isn’t just to help with the selection of a policy to cover the cost of care, it includes serving as the consumers’ advocate when problems arise, identifying cost-saving opportunities and keeping consumers apprised of new changes to the industry that may impact them.

A 2010 survey of NAIFA members who handle health policies found that they receive an average of 223 requests for assistance each year from clients who are having difficulty resolving health insurance claims. And our survey just dealt with claims issues. Members have told us they spend countless hours providing customer service in other areas, such as explaining coverage options and navigating government benefits. The agents are experts on the health insurance industry and its products; they are well educated, highly trained, and tightly regulated. They develop personal relationships with their clients and become familiar with clients’ individual needs. Consumers simply cannot get anywhere close to the same level of service from a government or insurance company 800 number.

As NAIFA President Terry Headley told Politico, “The unintended consequences [of marginalizing healthcare agents] will be less competition, a disrupted service industry and significantly reduced customer service.”

The health care system is getting ever more complex with new levels of government involvement. And anyone who has suffered an illness or injury knows that you can’t get proper medical coverage or care simply by purchasing a ticket. Sometimes the assistance of a professional agent can make all the difference. 

A Message from NAIFA President Terry Headley

Dear NAIFA Members,

Welcome to 2011! I hope each of you enjoyed a wonderful and memorable holiday season with family and friends.

I would like to take this opportunity to thank you for supporting NAIFA over the past year, and special thanks to our NAIFA volunteer leaders for your quality and dedicated service to NAIFA. Our members’ commitment to our profession, our clients, and our association is a great source of inspiration and makes me extremely proud and honored to serve as your president.

I’d also like to provide you with a brief overview of some of the ways in which our NAIFA Board has been working with our national, state, and local volunteer leaders and professional staff to protect your business and the essential role of our industry, in serving the financial security needs of 75 million American families who depend upon us.

In December a NAIFA contingent of myself as President, President-elect Robert Miller and members of NAIFA’s Government Relations team met with all five SEC commissioners, including Chairman Mary Shapiro and her staff. We shared with the commissioners the results of recent surveys showing that NAIFA members fulfill a valuable role in providing needed financial services, products, and incidental advice for the vastly underserved middle market. We also discussed how added regulatory burdens, and particularly a mandated and imposed fiduciary standard of care, may threaten the business models of NAIFA members and hurt this core client base of middle-income investors. We intend to continue our dialog with them as the Commission continues its work to strengthen investor protection regulations.

We also were able to speak with several reporters during our trip to Washington DC in an ongoing effort to spread NAIFA’s message.

• I interviewed with Reuters for a story on our meetings with the SEC and the results of the NAIFA member and consumer surveys commissioned through LIMRA.

• I told InvestmentNews that NAIFA is working to ensure that an imposed fiduciary standard doesn’t undermine our members’ ability to continue serving our middle-income clients and disenfranchise this market segment from access to financial services and products.

• I sat for interviews with reporters from Bloomberg, Dow Jones Newswire, National Underwriter and InsuranceNewsNet to brief them on the fiduciary issue and other items on our agenda, including health care reform implementation, upcoming income tax reform (commenting on the Deficit Reduction Commission Report), and the new estate tax system rules.

• Finally, I had the unique experience of being interviewed on a segment on the new estate tax rules on Fox Business News' "Varney & Co."

But this was not an ending—it was plain and simple just a starting point. We face numerous challenges in the coming year, but you can count on NAIFA’s leadership, professional staff, and myself to be unrelenting and unwavering, as we continue to work on your behalf – to keep you in business, to help you grow your business, and to promote the ethical business practices of our members.

On behalf of the NAIFA Board, our officers, our NAIFA professional staff, and our national volunteer leadership, I want to thank you for your vote of confidence, active involvement, and level of commitment to our association and our profession—together, we will write the next chapter in NAIFA’s rich history—thanks again for doing your part. I wish you every success great health, happiness, and prosperity in the coming year and beyond.

Warmest regards,

Terry K. Headley, LUTCF, LIC, FSS
NAIFA President