Insurable Interest—Or Else
The consequences of not taking a very strong stand against the expansion of insurable interest laws could be the equivalent for the industry of touching the third rail. Before you know it, all that remains is a puff of smoke.
So it is good that the major agent organizations, the National Association of Insurance and Financial Advisors and the Association for Advanced Life Underwriting, have—finally—come out with a forceful statement warning their members to stay away from so-called investor-owned life insurance arrangements, which trample on the very concept of insurable interest.
Both groups also said they were working with the American Council of Life Insurers to oppose efforts to stretch insurable interest laws in the states.
The reason this is so important is that the investor-owned arrangement takes a life insurance policy very far from its main intent—protecting the lives of those important to the policy owner—and turns it into something not far from rolling the dice on how long someone with whom the investor has no connection is going to live.
The tax advantages of life insurance—lest people forget—are bestowed by the government and therefore can be rescinded. And let’s face it, the industry really doesn’t need to fight that particular fight.
This is how J.J. MacNab, a life insurance analyst who runs a Bethesda, Md.-based company called Insurance Barometer, describes these investor-owned arrangements. (I quote from a story by Steven Brostoff in last week’s issue.)
"She notes these arrangements involve a trust set up by a charity, which then sells fixed income security interests in that trust to institutional investors. The money raised by the charity, MacNab says, is used to purchase immediate annuities on the lives of the charity's donors.
"Then, she says, the income from the annuities is used to purchase life insurance on the same donors. The charity benefits by receiving the arbitrage from the program, MacNab says, in that the annuity rates received are more favorable than the life insurance rates paid out.
"Those who participate in these arrangements, she notes, have lobbied states to change their insurable interest laws to allow them.
"MacNab notes that the institutional investors participating in these plans, which she says include insurance companies and hedge funds, would not be able to purchase the life insurance contracts on their own. Rather, she says, they must borrow—or rent—the charity's interest.
"Investing in life insurance dead pools clearly goes against public policy," MacNab says. "The insurable interest laws pre-date the American Revolution and were put into place to prevent gambling on the lives of others."
I have to admit that reading MacNab’s comment that insurance companies were among the institutional investors in these plans made me blanch. Whoever these companies are, they deserve a swift kick in the butt for being so knuckle-headed that the smell of some profit would make them engage in something so unseemly. Have they gone so far from their original mission that they can condone this kind of "investment"?
There is already too much noise being made in the public forum about life insurance’s protection purpose being left in the shadow of life insurance as an investment vehicle. At the same time, it has almost become a mantra that a large swath of the public is either grievously underinsured or just plan uninsured, and usually you will find those in the industry chanting this mantra the loudest.
This is not a time for hand-wringing as usual, however. The industry had better pull out all the stops to ensure that insurable interest laws stay strong and reflect the true purpose of life insurance. It’s just possible that in doing this, the industry might also reconnect with some good old-fashioned reasons for selling more of it.