Life Settlements

In Whose Interest?
NAIFA and AALU Response to STOLI Threatens Advisors and Industry
by Daniel Harris, Esq

The response was swift, sure, and coordinated. The two major associations representing life insurance producers – the National Association of Insurance and Financial Advisors (NAIFA) and the Association for Advanced Life Underwriters (AALU) – spoke out in unison on the model legislation to address the phenomenon of Stranger-Originated Life Insurance (STOLI).
But an important detail got lost in their rush to speak out about the issue and to join the American Council of Life Insurers (ACLI). Neither AALU nor NAIFA asked their rank and file insurance advisors what they thought about the STOLI problem or, importantly, about the model legislation. Instead, a steady stream of misleading propaganda is provided to NAIFA and AALU members, which appears to have been written by life carriers’ trade associations.

NAIFA and AALU have become mascots for the ACLI’s attack on the secondary market for life insurance as the ACLI promotes state legislation based on the highly flawed and roundly criticized model act developed by the National Association of Insurance Commissioners (NAIC). The NAIC model, which has been cited by insurance watchdog groups as anti-consumer and harmful to the property rights of policyowners, severely restricts consumers’ access to life settlements by imposing restrictions on the right of assignment of a policy. The NAIC model also imposes unjustified restrictions on a life insurance agent’s ability to assist clients with life settlements. It would also establish, for the first time, full compensation disclosure by insurance producers in an insurance transaction.
In supporting the ACLI’s agenda, -without consulting their members, both NAIFA and AALU have staked out positions regarding the secondary market that raise troubling questions about their commitment to insurance agents and life insurance consumers.

While concerns about STOLI are legitimate, insurance producers should be very worried that the ACLI is advocating legislation that impairs agents from helping their clients with the valuable option of a life settlement and seeks to destroy the value of life insurance. While no one should be comfortable with the prospect of investors initiating life insurance without regard to insurable interest requirements, it would be unprecedented in American history to restrict the right of assignment as the NAIC model does.

Indeed, after careful consideration of the NAIC model, the National Conference of Insurance Legislators (NCOIL), a body of state insurance legislators from around the nation, concluded that the NAIC approach failed to address STOLI and would harm policyowners’ property rights in life insurance. NCOIL developed its own model that provides targeted measures to address STOLI, without harming the property rights and value of life insurance. The direct approach of the NCOIL Model goes after STOLI, not consumers or advisors.

No Analysis, No Debate

With both the NAIC and NCOIL model acts now on the table for consideration by state legislatures, one would expect that AALU and NAIFA would have carefully considered how each of the models affect the interests of their members and, of course, the clients they serve. A reasonable assumption would be that they would inform their members of the proposals and survey their members’ views. But they didn’t ask their members, instead choosing to follow the ACLI’s lead to support the NAIC Model Act.
Did the leaders of AALU and NAIFA survey their members to ask if they supported the restrictive $250,000 bond requirement for brokers to assist a client with a life settlement? Did they ask their members if they support the requirement that insurance producers and settlement brokers disclose their commissions? Since both trade organizations have long opposed full disclosure of compensation in life insurance sales, doesn’t this undermine that position? As it relates to STOLI, why does AALU support the NAIC model’s convoluted five-year ban on life settlements? This hurts the value of life insurance and serves no benefit to consumers. NCOIL concluded that the NAIC Model failed to address STOLI.

The Independent Insurance Agents and Brokers Association (The Big I) was concerned enough for its members, who are primarily property and casualty agents, it spoke up at the NAIC to “oppose efforts that go too far and interfere with property rights in an insurance policy and legitimate lending practices.” Where were AALU and NAIFA in protecting consumers’ property rights and in ensuring that agents could help consumers get needed life insurance using premium financing?
In fact, The Big I was so concerned with protecting insurance agents, that it warned the NAIC against carrier practices that were anti-consumer and harmed insurance agents. In an April 2006 letter to the NAIC, The Big I called on regulators to examine the troubling activities of life companies in which “Some carriers have even threatened to terminate or seek the criminal prosecution of any producer who submits such an application (using non-recourse premium financing) and this places agents in an untenable position when their customers ask for an available service that he/she is fearful of discussing or restricted from providing. These practices are troubling and may warrant the adoption of protections for consumers and agents who participate in premium financing.”

A Failure to Serve

The failure of NAIFA and AALU to represent its members should be alarming to insurance producers and financial advisors. But it should come as no surprise in light of the fact that NAIFA and AALU are economically indebted to life insurance companies.
In 2007, insurance companies gave well over $2 million to influence AALU’s Issues Alliance, the key public policy arm of the AALU, in comparison to approximately $400,000 from insurance producer interests. All but one of the top 11 donors to the Issues Alliance were insurance companies. With such dominance over it agenda, it is no wonder that AALU has been so responsive to the ACLI’s anti-consumer and anti-agent agenda.

NAIFA, likewise, has become indebted to contributions and loans from life insurance companies and their organizations. Having lost over 50% of its members in the past 14 years and facing charges that NAIFA has become “irrelevant and archaic,” NAIFA has turned to life companies to assist it in keeping members.

Just last month, Northwestern Mutual announced that it would reimburse its reps for their NAIFA dues. In doing so, NAIFA’s President, Jeffrey Taggart tacitly acknowledged the insurance company was seeking to influence the NAIFA legislative agenda, stating:,” By supporting NAIFA in its efforts, Northwestern Mutual is showing its dedication to fighting off harmful legislation.”
According to NAIFA’s 2004 tax filings, the organization received a $500,000 unsecured loan from the Life and Health Insurance Foundation for Education (LIFE), an organization that receives the vast majority of its financial support from life insurance companies. In 2005, LIFE reported that all 12 of its top contributors were life insurance companies, each having contributed from $100,000 to $1 million. At the time of the loan, LIFE’s President, David F. Woods, also served as NAIFA’s Chief Executive Officer, raising troubling questions about NAIFA’s independence from the life insurance companies.
It is no wonder that, in 2004, NAIFA did a complete flip-flop on the issue of whether life insurance agents were qualified to assist clients with settlements. Speaking then on behalf of its members back in 2000, -NAIFA opposed the ACLI’s efforts to impose separate licensing requirements on life insurance producers who wanted to transact settlements on behalf of their clients. NAIFA said then that such separate licensing, and requisite educational requirements were “patently anti-consumer” and that “the agent who originally sold a client the policy would generally be in the very best position to help his or her client to judge the continued viability of the policy.”

However, in 2004, shortly after receiving the LIFE loan, NAIFA reversed its position stating, in what can only be viewed as an insult to professional insurance agents, that life insurance agents were not competent or qualified to help clients with settlements. In arguing that separate testing and licensing of life agents was needed, then NAIFA President Randy Kilgore urged the NAIC to impose separate licensing and testing requirements to ensure “that those considering selling their policies will receive competent advice.” In just four years, life agents who NAIFA once stated were in the “very best position” to help policyowners with settlements had become incompetent in the eyes of their own leaders.

Now, as the STOLI issue is front and center in national policy debates, NAIFA has not asked its members about the issue or about their preference for the NAIC or NCOIL models. NAIFA’s support of the NAIC model’s $250,000 bond requirement for settlement brokers, supposedly as evidence of financial responsibility, is unjustified and unprecedented. The previous model and the settlement laws of nearly every state provide that an errors and omissions policy is acceptable. After considering the NAIC provision, NCOIL rejected such an onerous requirement.

What is even more astonishing is that NAIFA offers an errors and omissions policy to its members that boasts “coverage for life settlements is now included.” So, why then does NAIFA support a proposal that dumps E&O and imposes an unjustified quarter million-dollar bond requirement on its own members?

Producers and advisors should be concerned about NAIFA’s very odd support for compensation disclosure in settlement transactions. This contradicts NAIFA’s support for limited and targeted compensation disclosure in other insurance sales. NAIFA’s support for full compensation disclosure in settlements could be the “camel’s nose under the tent” that leads to full disclosure of compensation in all life insurance sales.

Informed conscientious advisors are the lifeblood of the industry. If NAIFA and AALU are not going to advocate for the interests of their members, members must speak for themselves. Producers should speak out against STOLI and in support of the targeted anti-STOLI provisions favored by NCOIL. Producers should not allow their trade associations to advocate for measures that attack life settlements and the secondary market as a whole. And producers should oppose anti-consumer and anti-agent provisions in the NAIC Model that are being promoted by the ACLI.
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Daniel Harris, Esq., is general counsel at the Life Insurance Settlement Association (LISA), the leading trade organization representing the secondary market for life insurance. He oversees LISA’s legislative and regulatory affairs and monitors trends in the life insurance industry. For more information, visit www.lisassociation.org.