Shadow Insurance Risk Warning

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The superintendent of New York State’s Department of financial Services Benjamin M. Lawsky has issued a report “Shining a Light on Shadow Insurance”  describing practices derided as “financial alchemy”.

In a typical shadow insurance transaction, an insurance company creates a “captive” insurance subsidiary, which is essentially a shell company owned by the insurer’s parent. The company then “reinsures” a block of existing policy claims through the shell company — and diverts the reserves that it had previously set aside to pay policyholders to other purposes, since the reserve and collateral requirements for the captive shell company are typically lower. Sometimes the parent company even effectively pays a commission to itself from the shell company when the transaction is complete.

Some commentators to this report weren’t overly concerned about the practice. The financial crisis of 2008, the role of insurer AIG, the complicit enabling by the ratings agencies, the lack of accountability to the perpetrators, the absence of reform does not engender trust to insurance companies that paper over risk in opaque shells to boost quarterly profits. Policy holders have to rely on their life carrier’s ability to pay claims for a very long period of time.

Consumers shopping for life insurance should be aware of the distinction between publicly-traded life insurance companies, answerable to their stock holders, and those mutual or privately held, and to what extent a company has reinsurance is ceded to affiliated captives.

Betty White raps for life settlements: seniors beware

Nationwide suspended underwriting on coverage over $1,000,000 for one of the universal life (UL) products due to “improper use”.   Nationwide did not elaborate, but this could be due to stranger-originated life insurance which prompted a similar restriction in 2010 sales for individuals over 65 with face amounts over $100,000.

Looking into what’s new in the dubiously ethical world of investors buying life insurance policies, it was a surprise to see that Betty White has clocked over 1 million views with a video pitching life settlements.

I wonder what her late husband Alan Ludden would have thought.  Betty White’s video opens at the Los Angeles Zoo.  A walkway there is named in Ludden’s memory.  As a  kid in the 1960’s,  I developed a good deal of respect for his intelligence and warmth watching him host the G.E. College Bowl and Password.

Policy holders considering a life settlement should be aware of all their options to maintain their coverage for their beneficiaries.  Not all of those options might be given by a life settlement agent, called a viatical settlement provider.  This article by JJ MacNab gives a good overview.  Viatical settlements requires a separate license for agents.  To make sure of an objective overview, ask a life insurance agent that is not licensed for life settlements for options to retain or replace coverage.  Ultimately, find an agent that holds a high standard in maintaining their fiduciary responsibility to advise and act in the policy holder’s best interest.

Here are some alternatives to selling your life policy:

Borrow from the cash value to pay premiums

Accelerate a portion of the Death Benefit  (if terminally ill)

Replace the coverage and either taking out the cash surrender value or roll it over in with a 1035 exchange

Beneficiaries taking over ownership and making premium payments.

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Locating lost life insurance policies in Missouri

The Missouri Department of Insurance now provides a locator service for lost life insurance and annuity policies.

People who believe they are beneficiaries, as well as executors and legal representatives can file a search request form with the Department of Insurance. Completed forms should be notarized and include a copy of the original death certificate before being mailed to the department.

Requests will be forwarded to Missouri-licensed life insurance companies each month. Insurance companies will then contact the beneficiary if a policy is located.

For policy holders here are some tips on making sure that your policy claim gets paid.

New consumer protection at claims time

Life insurance  policy holders should carefully plan ahead so their beneficiaries are promptly paid their life insurance money.  The beneficiary should be aware the pay out procedures of the life insurance carrier.

California adds some protection

On October 2nd Governor Jerry Brown of California signed a new law requiring life insurance companies to get approval from beneficiaries to keep death benefit payments in retained asset accounts.  This is good news for California consumers.   Any steps taken to safeguard this process are welcome.

Check vs. check book

Life insurance is not necessarily paid out as a lump sum.  Don’t assume the beneficiary of a $500,000 life insurance policy gets a $500,000 check in the mail.  Starting in 1983, life companies began adopting the practice of sending beneficiaries a check book with pay out options.  Nothing to stop the beneficiary for writing a check for the lump sum and depositing it a bank, but if not the benefit is kept in a retained asset account.  Why did this happen?  Simple.  Life insurance companies earn a profit on the money retained.   Was this a bad deal for the consumer?   It depends on the company, the interest rate offered, protections and fees charges.  Financially sophisticated beneficiaries would find the highest rate of interest possible for their money and move their money immediately for the highest rate of return or to lock in an annuity or investment.   This retained account works against beneficiaries who delay making a decision or do not shop around for the best return on their money.   Also this money is not FDIC insured.

According to the National Association of Insurance Commissioners, the key issues for retained asset accounts:   (emphasis mine)

  • What interest rate will be paid on the proceeds, how will the interest rate be determined and how will the interest amount be credited to the account?
  • Will the proceeds be held in a bank, which would make the proceeds FDIC insured up to the limit permitted by law?
  • Will the proceeds be held by the insurer, which would make the proceeds subject to coverage by a state guaranty fund should the insurer fail?
  • Will the proceeds be held in a bank checking or an insurer draft account and what banking services, if any, will be provided?
  • What services will be provided at no charge and what services will involve a fee?

More consumer protection and awareness is needed

Beneficiaries who do not move their money were taken advantage of with uncompetitive interest rates, high fees and lack of protection offered by federally regulated banks. Keeping the money in a retained asset account opens the beneficiary to other possible abuses.

It’s important for someone to give the beneficiary sound financial advice at claims time.  Given the beneficiary is possibly grieving and at the insured passing away, he or she may not ready to make a good decision in a timely manner.

A policy owner should have a life insurance agent who is actively servicing the policy.  If you are not in contact with the agent who sold your policy to you, an agent like myself can become your servicing agent.  When the insured passes away, the agent can assist the beneficiary with the death claims: contact information, the claims form, and which other collaborating information is required: the death certificate and often a public notice of the insured passing away.   Also the agent should inform the beneficiary of the company’s pay out practices, to give the beneficiaries advice on what is in their best interest.  Remember an independent agent is not employed by the life insurance company.  The agent duty is to work in their client’s best interest.

Ideally what the beneficiary does with the life insurance money is an informed choice made in council with a family adviser, financial professional or executor.  Life agents can serve the beneficiaries by informing them of their annuity options.  It is important for the beneficiary, if desiring an annuity, to shop for the best deal, and not automatically take an annuity offered by policy holder’s company. What best will depend on the beneficiaries situation.  A conscientious servicing agent knowing the policy holder’s intentions and instructions is in a very good position to help serve in the beneficiary’s best interest.