Trade Groups Say Carriers Interfering With Market
LISA says they're illegally competing with providers while ILMA and LISA believe demands for policy purchase prices aren't required under IRS tax reporting rules and tax law.
Donna Horowitz
August 7, 2019

Both U.S. life settlement trade groups are up in arms over what they see as carrier interference in the market, with one of the groups lambasting it as "encroachment."

The life insurance and life settlement industries long have been at odds, but the situation has heated up lately with efforts apparently by insurance companies to interfere with the life settlement market by making competing offers on policies and demanding purchase prices under a yet-to-be-finalized Internal Revenue Service rule.

An attorney representing the largest trade group, the Life Insurance Settlement Association, wrote to insurance regulators last fall complaining about what he saw as illegal conduct by Lincoln Financial Group in offering more than 5,000 policyholders the option to take enhanced cash benefits to retire their policies.

If any of the offers were accepted, it meant those policies would never hit the life settlement market and the insurer would never have to pay death claims for them.

Now, LISA said that Sun Life Assurance Co. of Canada has begun taking a more aggressive approach this spring - competing one-on-one with life settlement providers when it learned policies were for sale after change of ownership, change of beneficiary or verification of coverage requests were made.

In return for surrendering the policy, the insured would receive the cash surrender value plus an additional payment. Sun Life has entered into bidding wars with providers, raising offers in response to higher life settlement offers, LISA said in its Thursday, June 20, Public Policy Council teleconference packet obtained by The Life Settlements Report.

In addition, other carriers, including John Hancock Life Insurance Co. and Protective Life Insurance Co., are apparently sending letters to policy purchasers saying they must tell them policy sales prices due to a new IRS reporting rule under IRC 6050Y, which were added by the Tax Cuts and Jobs Act.

The Life Settlements Report has seen a copy of a John Hancock letter demanding a purchase price with the recipient's name blacked out. A source said that Protective Life has written a similar letter, although a copy of it was not available to be verified.

There's one problem with this: the rule hasn't been finalized and the law implementing the rule said carriers are not entitled to pricing information.

The request so alarmed Jack Kelly, who heads the other trade group, the Institutional Longevity Markets Association, that he said he reported the demand to the IRS general counsel's office about a month ago.

"ILMA has been actively involved in this issue since it was first brought to my members' attention in mid-April," Kelly, managing member of ILMA, said.

"We've advised our members that such requests for information are premature and unwarranted until such time as the final rule has been promulgated," he added.

He said he didn't know if not responding to a request for pricing information has held up any transactions, saying he's aware of three cases in which such requests were made. He declined to name the carriers which made the requests.

Ruth Ray, compliance director with Montage Financial Group Inc. of San Juan Capistrano, Calif., said her provider received a notice from a carrier asking for the price for a purchase about eight weeks ago when the provider made a verification of coverage request.

She didn't remember which carrier sought the information, but said the transaction wasn't held up after her company told the carrier that reporting information isn't required yet.

Ray gave the carrier's representative the benefit of a doubt about why it was making such a request.

She said the representative "might have had good intentions" and may have been "just a little uninformed."

LISA's leadership is so perturbed that it put the IRS reporting and "encroachment" issues on the agenda for its teleconference meeting for its new Public Policy Council last week to discuss the situation.

"The issue of carrier encroachment is LISA's top priority because if a party interceded or transacted a life settlement without proper licensure and disclosures required by various states that would be highly disruptive of the regulated life settlement market," Chris Conway, board chairman of LISA, said.

Life settlement companies in most states must be licensed, he said. Many of them require brokers and providers to get forms approved. In addition, many of the states require consumer disclosures such as the right to rescind a sale, he noted.

"These regulatory protections are not afforded to them (consumers) if transactions are happening outside the regulations," Conway said.

"Right now, we've become aggressively proactive to inform the regulators and their staff where we have clear documentary evidence of encroachment to address this issue," he added.

He said LISA still is in the evidence-gathering stage and is asking its members to send him or the group's CEO, Bryan Nicholson, or staffer Nisha Thakker any information on what they're seeing. They're with Association Management Strategies Inc. of Washington, D.C., the outside management firm that has been running LISA since April.

Once the final IRS regulations are completed, he said LISA will hold a series of educational sessions for its members on how to comply with the new tax reporting requirements.

"We do expect there will be parties who will not be familiar with the specific requirements for each of the different kind of reports," Conway added.

He said LISA knows anecdotally that some carriers have asserted their right to pricing information.

"There is a fair amount of confusion among market players with respect to the specific regulations and how they apply to the vast array of transactions. It's not beyond the realm that carriers might be confused at the operational level," he said.

Conway said his group has no verification yet on whether requests for prices and any refusals to provide them are delaying transactions because the group is in the midst of collecting information from its members.

But wrongly asking for such IRS information could have consequences.

"No carrier should be able to require, as a condition of approving and recording change forms, that the new owner report to the carrier the amount paid by the new owner to the seller," said an email by Tom Sherman, an attorney with the Locke Lord LLP law firm in Atlanta, who has sent comment letters on behalf of LISA about the proposed rule to the IRS.

"A strong argument could be asserted that any such requirement by a carrier would be a violation of both federal and state laws (and possibly an unfair trade practice as well). The proposed regulations and forms are clear that the acquirer is not required to report to the carrier the amount paid to the seller."

Sherman gave a slide presentation at the LISA call last week.

His presentation advises LISA members to "provide to each payee only that portion of the IRS report that pertains to that payee."

It added: "And for Acquirer reports to the carriers - only report as to the seller and, most importantly, exclude the amount paid to the seller."

One of his slides said market members will see a four-part form: one part for the IRS, one for each payment recipient, one for the carrier and one to be retained by the acquirer.


Nat Shapo, an attorney with the Katten Muchin Rosenman LLP law firm in Chicago, who is representing the association, contacted five state insurance departments about what the trade group saw with Lincoln last fall and now apparently will repeat the process with Sun Life.

Shapo, who declined to comment for this story, wrote a letter in October to the Florida insurance commissioner alleging that Lincoln was acting as an unlicensed life settlement provider by offering enhanced cash surrender payments.

He complained that the insurer offered this option to about 5,300 policyholders nationwide who own Lincoln LifeGuarantee SUL 2009 policies.

His seven-page letter said Lincoln National Life Insurance Co's conduct violated "a slew of consumer protection laws," including Florida laws on acting as a life settlement provider without a license, changing approved policy forms without filing amendments or riders for review and likely engaging in discriminatory behavior.

At that time, he said a review of several of the policies showed that Lincoln was offering policyholders between 59% to 81% above the basic cash surrender value.

Initially, Shapo's work on behalf of LISA was paid for by Coventry First LLC through May, according to a LISA Public Policy Council document for the conference call. Although it said he had contacted five state insurance departments, it did not say what, if anything, resulted from his efforts.

Despite repeated requests over the ensuing months by The Life Settlements Report, Karen Kees, a spokeswoman for the Florida Office of Insurance Regulation, has refused to say how the agency has responded, although she acknowledged on Oct. 23 that it received LISA's letter.

As recently as Jan. 30, she replied that the department had no additional information to provide at that time. She said the same thing in a Nov. 14 email. She has not responded to an additional email on Monday, June 24.

Not everyone in the market was critical of Lincoln's offer.

Larry Rybka, CEO of ValMark Securities Inc., an Akron, Ohio-based life insurance brokerage that also runs a life settlement broker, said he saw nothing wrong with Lincoln's offer.

Lincoln said "we're going to give twice as much cash value. What's wrong with that?" he asked.

"I think it's evidence of good behavior by Lincoln. I can't see how any regulator would have a problem with that" especially contrasting that with carriers who have been raising cost-of-insurance rates, he added.

Media representatives for Sun Life, Protective and Lincoln either did not comment or did not respond to a request for comment.

Originally posted June 27, 2019 on