Key Person and Group Life in NY

Posted on August 5, 2008 by Cailie Currin
We are starting to get a significant number of questions regarding  the product design implications of the recent changes to the NY Insurance law with respect to group key person life insurance. 

Without going into a lot of detail on what has been a complicated problem for life insurers in this market,  the new law - which was effective immediately - now permits group corporate-owned life insurance, where the insurable interest is established based on "lawful and substantial economic interest."    COLI can now be written on a group basis in both the "true COLI" market where insurable interest is established by statute to permit funding of nondiscriminatory employee benefit plans as defined by ERISA, and in the "key person" market where the insureds are often highly compensated employees. 

The new law requires that the employer notify the proposed insured in writing of the intent to insure, and that the policy holder will be a beneficiary on the death of the insured.  The insured must consent in writing to the coverage. 

The ability to write these policies on a group basis affords much more flexibility in product design.  No where is that more significant than in policies offering private placement investment options.   When writing on a group basis is feasible, this legislative change offers new possibilities for policies with more restricted liquidity than is permitted on individual variable life products. 
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NY OGC Issues Opinion on Insurable Interest

Posted on June 17, 2008 by Cailie Currin

On June 16, 2008, the NYSID published on its website an OGC opinion (080502)  dealing with insurable interest under section 3205(b)(3).  The context is a life insurance policy purchased by and for the benefit of a charity in order to advance an individual's goal of using a self-directed IRA to provide funding to a charity without adverse tax consequences.

The facts are very specific and the opinion quite fact-dependent, and so on first review it might appear to be limited in its applicability.  However, what I found to be the most interesting part was towards the end where the opinion compares this determination that there is an insurable interest with an earlier OGC opinion. That was an arrangement to raise funds through a securitization arrangement and to use the proceeds to purchase life policies and annuity contracts on a pool of donors.  There, section 3205(b)(3) was determined not to be satisfied because the transaction appeared to provide more benefit to third party investors than to the charity. 

In this case, opines the NYSID:  "The Plan differs significantly, from that prior proposal in that there are no unrelated third parties who stand to reap the vast majority of the benefits of the insurance procured.  In addition, the Plan does not involve or contemplate a life settlement or other prearranged assignment of the policy as a means of evading the Insurance Law's insurable interest requirement."  

This seems a clear statement by the NYSID that they realize that transactions are not always what they seem:  Perhaps a recognition that there are real and significant attempts to evade insurable interest requirements and potentially unknowable prearranged assignments.  Perhaps this might be an indication that the NYSID will reconsider its position on prohibiting fraud exemptions to the incontestability provisions of life insurance policies.  The Opinion concludes with:  "Please note that the conclusion herein does not preclude the Department from finding, in the event that different or additional facts apply, that the insurable interest requirement of Insurance Law section 3205 may not be satisfied by a purportedly similar transaction." 

This opinion recognizes that facts make all the difference:  "Assuming all that all of the pertinent facts are as described, a policy of life insurance issued in connection with the Plan would not violate the insurable interest requirements of section 3205."  Sometimes it can be very difficult to determine all the pertinent facts - especially when there is a concerted effort to conceal them.  Three little words, currently prohibited,  "except for fraud" might allow companies the opportunity to have their day in court on whether there are pertinent facts in a particular case that have been purposely concealed.  

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