Will regulators kill off fledgling secondary market for death benefits?

State insurance regulators last Monday voted in favor of a proposal that would allow insurers to terminate an annuity living or death benefit if a client sold the contract over the secondary market.

The management committee and full commission of the Interstate Insurance Product Regulation Commission, a group that is affiliated with the National Association of Insurance Commissioners, voted in favor of a uniform set of additional standards for guaranteed living and death benefits that are attached to individual deferred annuities.

The commission comprises some 36 jurisdictions, including Puerto Rico. Thirty regulators took part in the full commission vote last Monday, with only Indiana voting against the proposal.

Although the new standards include updated requirements for living- and death-benefit forms, including an explanation of how insurers would determine the guaranteed-benefit base and the conditions under which the base could increase or decrease, they also contain the hotly debated provision that would permit carriers to nix the benefit upon the change of ownership.

The regulators did provide a few scenarios under which insurers wouldn’t be permitted to kill the death benefit. Those include a change in which the new owner essentially would be the same person — such as when individual ownership was changed to a personal revocable trust — or if the assignment would be for the purposes of performing a 1035 exchange of the contract.

Members of the life insurance and life settlements industries have been jousting for months over the selling of annuity benefits. Life insurers have argued that if institutional buyers began purchasing the benefits, consumers would get hit with higher fees for the features.

A secondary market for living and death benefits has cropped up, Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers, said last week.

“Just a week ago, we learned through the investigative reporting of a major newspaper that there is a secondary market, and there exists an ugly reality,” he said, citing The Wall Street Journal. “Investors are misusing individuals in exchange for modest payments, hiring them to act as fronts to acquire annuity products with guarantees for misuse to the advantage of the investor, speculators and middlemen.”

But Brian K. Staples, president of RIGHT LLC, a regulatory consulting firm for the life settlements industry, disagrees with Mr. Lovendusky’s claim.

“A point that’s lost in these discussions is that the industry wants to harp that the secondary market is the evil that’s creating stranger-originated business,” Mr. Staples said. “The primary side is the one that writes these products.”

Mr. Staples added that variable annuity holders ought to be able to sell their annuity benefits if they don’t perform as promised.

“Consumers are losing all the way around if the product doesn’t perform the way it was sold,” he said. “Should we deny customers the ability to seek assistance in the secondary market?”

The response to that question last week by three dozen or so insurance regulators was fairly definitive.

E-mail Darla Mercado at [email protected].