LICAC Proposes Expansion of Life Insurance Consumers’ Bill of Rights
July 30, 2021
The Life insurance Consumer Advocacy Center (“LICAC”) has added an additional protection to the Life Insurance Consumers’ Bill of Rights that it proposed on September 18, 2020. (See September 18, 2020 blog post)
The new provision would overrule a recent California court case which held that an agent selling life insurance on commission for a life insurance company is nevertheless the agent of the policyholder and that life insurance companies have no obligation to supervise their agents. The new provision would restate California law to make clear that 1) an agent selling life insurance on commission is considered the agent of the insurer, not the insured, and 2) the insurer has a duty of ordinary care to supervise its agents. More details about the errant court case and the need for these changes can be found at https://www.lifeinsuranceconsumeradvocacycenter.org/california-court-decision-immunizing-insurers-from-responsibility-for-their-agents-must-be-overturned-by-statute/
The goal of the Life Insurance Consumers’ Bill of Rights is to protect consumers from losing their savings in Life Insurance Investment Schemes. The concept for the bill was first discussed with representatives of the California Department of Insurance in February 2020. The reforms set forth in the bill should be adopted nationwide, though initial legislative efforts will focus on LICAC’s home state of California.
Problem: Life Insurance Investment Schemes (“LIIS”) are life insurance policies touted and sold as investments that can provide tax-free payments for retirement or for medical, dependent care, or other expenses. But no tax benefits can be obtained unless the policy remains in force until the death of the insured, and 80% to 90% of the policies will lapse and thus fail to remain in force until the death of the insured. Consumers continue to invest billions of dollars in these policies, but they are often little more than a scam, especially when sold to middle- or lower- income consumers, whose policies are most prone to failure.
As expanded, the proposed bill would:
- Require that producers/insurers who sell LIIS act in the best interest of their customers. Currently, agents selling LIIS generally have no legal obligation to act in the interests of the consumers they serve despite having financial interests that conflict with those of the consumer. But consumers must as a practical matter put their trust in the agent because consumers have essentially no chance of assessing for themselves whether a LIIS policy is a good investment. Usually it is not a good investment, but the consumer follows the agent’s advice and buys it anyway, often losing a major part of the consumer’s retirement savings.
Bottom line: “Buyer Beware” is not acceptable for LIIS policies. - Restate California law to make clear that 1) an agent selling life insurance on commission is considered the agent of the insurer, not the insured, and 2) the insurer has a duty of ordinary care to supervise its agents.
- Require that agents disclose to consumers the commissions the agent would receive if the consumer buys a policy being offered by the agent. Agents currently have undisclosed financial conflicts of interest with the consumers they serve, but the bill would make sure the agent’s financial stake in the transaction is disclosed. In addition, the bill would end the practice of insurer’s paying agents cash or non-cash compensation that is based on the agent’s reaching a target levels of sales, as such compensation methods can further distort or bias the agent’s recommendations to the consumer.
- Require that all fees applicable to LIIS policies be disclosed in a meaningful way in policy illustrations, which are used to sell policies to consumers. Currently, according to a recent federal court decision, insurers are not required to disclose fees in the policy illustrations given to consumers. Many insurers make such disclosure optional in their illustration systems. It would be a simple matter to require fee disclosure. Consumers should also be told that any fee not labeled “guaranteed” may be increased by the insurer at any time.
- Require disclosure to consumers that LIIS policies cannot deliver any tax avoidance benefits unless the policy is kept in force until the death of the insured and that consumers, especially those who are not wealthy, generally find it extremely difficult to keep a policy in force for an entire lifetime.
- Limit the use of certain deceptive features found in many indexed universal life policies, the fastest growing segment of the universal life market:
- Require insurers offering multi-year indexed strategies to pay prorated interest upon lapse or surrender; for indexed strategies of one year or less, the forfeiture of interest upon lapse or surrender must be disclosed as a surrender charge.
- Require insurers offering interest guarantees based on periods of longer than one year to disclose that their guaranteed interest rates are NOT true annual rates.
- Prohibit the use of multipliers in indexed universal life policies. Currently, insurers are offering add-on features called “multipliers” that inflate the policy values the insurer can show in its illustrations but have no real benefit to consumers.
- Overrule a federal court decision that prevents consumers of life insurance from enforcing violations of existing laws preventing fraud and unfair business practices in the use of illustrations to sell life insurance.
- Task the Department of Insurance to report to the Legislature on ways in which LIIS policies can be redesigned to improve persistency rates. Currently, LIIS policy designs produce high lapse rates (low persistency rates), but there is no reason that policies need to be designed that way.
- Task the Department of Insurance to report to the Legislature on ways to reform agent commission structures that pay agents based largely on first year premiums. Agents currently have little or no financial incentive to sell policies that can be expected to last until the death of the insured; consequently, the vast majority of LIIS policies do not persist until then. Commission structures should be reformed to pay agents based on the persistency of the policies they sell.