New York – NY Officials Require Insurance Policy Conversions

New York – New York officials have ordered an insurance company to convert a client’s term life insurance to permanent policies that she can resell in the growing secondary market.

Insurance Department Counsel Paul Zuckerman told John Hancock in a letter that it faces disciplinary action otherwise. The company must also give her adequate time to pay any differences in premiums, he wrote.

State law prohibits taking out life insurance on strangers, essentially betting on their deaths, but permits policyholders to sell theirs after two years. The woman, who wasn’t named publicly, filed complaints after the insurer refused to convert policies with a face value of $11 million that she planned to sell to settlement company Coventry First LLC.

“This is one of the most important issues that affects the entire secondary market,” said Coventry chief executive Alan Buerger. “If Hancock had been allowed to succeed in their efforts, it would have taken away 20 percent of the market to the disadvantage of consumers.”

Buyers, who since 2001 have acquired about $35 billion of life insurance from consumers, pay anywhere from 2 to 60 percent of the face amount of policies, depending on the health of the policy owner, premiums and the carrier’s rating, Buerger said. On average, they pay about 17 percent, or 3 1/2 times the average of what insurance companies provide clients for surrendering policies.

John Hancock argued that the conversions constitute new policies, and that Coventry First lacks the required personal interest in the woman’s welfare to be beneficiary.

John Hancock spokesman Roy Anderson said Monday it’s the company’s policy not to comment on matters about specific policyholders or in litigation. “Our actions are guided by our obligations to comply with the law and the terms of our contracts. This serves the best interests of consumers,” he said.

Zuckerman wrote that certain life insurance policies give the owner a contractual right to convert them to another type of life insurance policy. He said pay-as-you-go term life policies often carry options to convert to permanent policies like whole life or universal life. Typically, with no increase in the benefit, there’s no new underwriting. It has been the longstanding industry practice to consider them extensions, he wrote.

“Finally, we recognize the importance of the insurable interest doctrine in differentiating between insurance policies and mere wagers and that there is some tension between the law’s distaste for wager policies and its sanctioning an insured’s procurement of a policy on his or her own life for the purpose of selling it,” Zuckerman wrote.

But, he said, it is not his department’s role to add a good-faith requirement to state law.

In November, New York’s Court of Appeals concluded that state law permits an insured adult, acting “on his own initiative,” to get a life insurance policy for the benefit of any person, firm, association or corporation he or she chooses, not just for a dependent or other usual beneficiary.

A 2009 legislative change, which took effect last May, set the two-year waiting period before reselling your life insurance policy. It also prohibits intermediaries, without any personal interest in an insured individual, from arranging or planning in advance for someone to obtain a policy and designate them as intermediary as beneficiary, meant to bar so-called “stranger-originated” life insurance.

In December, the state Insurance Department began licensing life settlement providers under the new law, saying it marked the first time that industry has been regulated in New York. The agency said more than two dozen companies already doing business here legally could keep operating while their applications were pending.

The law requires that policy owners be given an information booklet and disclosures about offers, counter-offers and fees paid to brokers.