Investor-Owned Life Insurance & annuity suitability top list of customer concerns identified by companies, regulators

There is no doubt that insurance issues are among the most serious concerns of many consumers these days, but not necessarily the same ones that have fired up town halls around the country.  Two of those topics, Investor-Owned Life Insurance (IOLI) and the suitability of annuity sales to seniors, were identified as 2009 Exchange presenters as particularly worrisome.

Jean Philipp, senior fraud investigator, Corporate Ethics & Compliance, MetLife, focused on IOLI, a phenomenon that came on the scene around 1999-2000 and that reached a frenzied peak between 2004 and 2006. In effect, IOLI products are life contracts written on seniors by investors who would otherwise have no insurable interest in the people named in the policies.  The pitch focuses on the idea of convincing seniors that they have “personal unused life insurance capacity” that can be leveraged to create gifts to charities, provide windfall benefits for heirs or even aid in generating additional funds for retirement. The named insured doesn’t even need to pay the premium up front. It’s loaned by the investor group.

On its face, it sounds harmless enough, except that among the profusion of applications for IOLI arrangements over the years have been many falsified to obtain coverage on seniors who would not otherwise qualify for life insurance.  Agents submitting doctored apps are quick to point out that there is no harm to the customer and nothing to worry about. That is, unless the insured is drawn into an investigation triggered by a life insurer raising a red flag on a questionable submission, which has happened.

“Believe me, it is not pleasant to have someone wearing a badge show up at your door to inquire how your name and signature showed up on a fraudulent life insurance application,” said Philipp, whose company has a written policy prohibiting participation in the secondary market. “We will not knowingly issue policies in this market, and we are pleased that states are getting much more aggressive in investigating this business.”

Free lunch, blank apps

Philipp related one story in which an investor group invited seniors to a free breakfast or luncheon, gave them the pitch and then handed out blank applications to be picked up later. All that was required of the invitees was to sign the apps and turn them in. The applications were then used to attempt to secure life policies ranging from half a million to $2.5 million dollars.

“In cases such as this, the consumer can unwittingly become a suspect in the investigation,” Philipp said.  Incredibly, one 82-year-old in such a scheme ended up with 17 policies totaling face amounts worth $127 million.

The misrepresentations are often bold in the extreme. Philipp has interviewed individuals who were told that they could get up to $5 million in coverage with no medical exam required, a benefit level at which medicals involving blood and urine samples are routinely required. That’s not to say they weren’t submitted – just somebody else’s specimens in cases of medical substitution.

As to the question of “no harm” to the consumer, Philipp noted one aspect that may not be considered by the applicant. The process often involves generic medical information release forms with open-ended dates, allowing a third party access to the person’s medical records at any time.

Then, there are the premium financing loans advanced to seniors in order to cover the cost of the insurance. Just sign right there. No risk.  Except for one small problem.  Such contracts may require that the insured be responsible for the entire premium financing repayment in the event the face amount cannot be settled – at which point the insured or family members may be on the hook for thousands of dollars under the premium financing loan.

“In one case we discovered a so-called ‘longevity study’ that was being promoted in the states of Missouri and Florida,” Philipp said. “Seniors were contacted and told that if they agreed to take part in the study they would get free life insurance, with 1 percent of the benefit going to their heirs. Sounds pretty good when you consider the 1 percent of a million is $10,000.  However, as a part of the process the participants had to sign a HIPAA release that would allow the investors to track health history until the person died.”

In another Missouri case, an investor group was offering free housing to seniors who signed up for IOLI contracts.

“The whole premise sounded wrong,” Philipp said, prompting MetLife’s call to the DOI. “We saw a real possibility of some worst-case scenarios in this scheme.”

Philipp noted that MetLife is happy to collaborate with any other insurers to keep the life application process clean and to keep customers from getting caught up in such schemes.

Click here to view Philipp’s presentation.

Focus on suitability

One state that has a major stake in making sure that the life application process, and indeed all insurance process, are kept clean and above board is Wisconsin. As Kim Shaul, Wisconsin Deputy Insurance Commissioner noted, Wisconsin is one of the strongest and most dynamic insurance markets in the country, ranking sixth in the nation with 120,000 licensed agents, 2,000 licensed companies and earning $150 million in franchise and premium taxes. The insurance industry is one of the state’s top employers, with giants such as Northwestern Mutual, Sentry, Church Mutual and Wausau sharing the Badger State with tiny Ashland County Mutual, which boasts 1,000 customers.

Like other regulators, companies and industry watchers, Shaul noted that the Wisconsin DOI too is concerned about issues such as STOLI/IOLI, suitability of annuity sales and other important consumer concerns. Wisconsin Commissioner of Insurance Sean Dilweg convened a Life Settlements Work Group in December 2008 to study issues of concern to companies and consumers. The effort included representatives from insurance and life settlement companies.

“The result of the working group was the agreement to arrive at a common definition of STOLI, to toughen disclosure requirements and to enact a five-year prohibition on life settlement transactions,” Shaul said. She noted that the STOLI definition and five-year prohibition elicited predictable opposition from the life settlement industry, but that there was general agreement on other provisions.

Another key concern of the Wisconsin DOI is the perennial issue of suitability related to annuity sales. State regulators are currently working to update suitability statutes in concert with the NAIC to update the model regulation. This follows more than 280 complaints regarding unsuitable sales of annuities in the past two and a half years and a number of major enforcement actions.

“Seniors are the silent victims of unsuitability situations,” Shaul said. “And the older they get the more hesitant they are to admit their mistakes to authorities or to go to their children. So to get a complaint is really significant, so the state of Wisconsin has gotten really proactive about looking into these complaints.”

Wisconsin is currently chairing the working group, with the current exposure draft closely parallels the FINRA (Financial Industry Regulatory Authority) rule 2821, which requires insurers to maintain effective supervision programs regarding the suitability of annuity sales.

“Expect a completed draft of the suitability recommendation sometime in December 2009,” Shaul said, noting that companies that adhere to appropriate suitability standards need not fear tightened regulation.

“Insurers will not be penalized unless there is a clear pattern of abuse in the suitability arena,” Shaul said.

Click here to view Shaul’s presentation.

Contact Info:

Jean Philipp
Sr. Investigator, corporate Ethics & Compliance
MetLife
314.525.9936
jphilipp@metlife.com
www.metlife.com

Kimberly Shaul, J.D.
Deputy Commissioner
Office of the Commissioner of Insurance, State of Wisconsin
608.267.1233
Kimberly.shaul@wisconsin.gov
http://www.oci.wi.gov/