The Connecticut Insurance Department and the Connecticut General Assembly have each taken steps to strengthen consumer disclosures relating to life insurance policies, although with respect to one issue the two are taking different approaches that the industry may have to reconcile.
On February 3, 2011, the Connecticut Insurance Department (the “Department”) issued Bulletin IC-27, regarding the “Use of Retained Asset Accounts” (the “Bulletin”). Insurers are expected to implement the provisions of the Bulletin within ninety days of the issue date.
The Bulletin is based on the National Conference of Insurance Legislators’ (“NCOIL”) Life Insurance Beneficiaries Bill of Rights (the “NCOIL Bill of Rights”). The Bulletin uses the NCOIL definition of “retained asset account”, which means a mechanism pursuant to which the settlement proceeds payable under a life insurance policy are deposited into an account retained by the insurer that has check or draft writing privileges. Retained asset accounts are used to give life insurance beneficiaries more time to consider all financial options available to them with respect to the life insurance proceeds in question.
The Bulletin requires insurers to provide beneficiaries with written information explaining the settlement options available under the policy and how to obtain specific details related to the options.If an insurer settles benefits through a retained asset account, the insurer must provide the beneficiary with a supplemental contract that clearly discloses the rights of the beneficiary and the obligations of the insurer under that supplemental contract. The Bulletin goes on to describe the disclosures that must be made. These include, among others, that a draft or check may be written to access the entire amount, a description of fees charged, the minimum interest rate on the account and how interest is calculated, and that the funds in the retained asset account held by insurance companies are not guaranteed by the Federal Deposit Insurance Corporation but may be guaranteed by the state life and health insurance guaranty associations.
At about the same time the Department was issuing the Bulletin, the Senate Co-Chair of the Connecticut General Assembly’s Insurance and Real Estate Committee, Joseph Crisco, introduced Senate Bill 171, An Act Adopting the National Conference of Insurance Legislators’ Life Insurance Beneficiaries’ Bill of Rights (“SB 171”). Senator Crisco has served as chair of the committee for a number of years and is active in NCOIL.
The introduction of this legislation raises the prospect that Connecticut law will contain two differing sets of requirements with respect to retained asset accounts because the Bulletin differs from the NCOIL Bill of Rights in several respects. First, while the Bulletin explicitly requires an insurer to enter into a supplemental contract when using a retained asset account, the NCOIL Bill of Rights does not have this explicit requirement.1 Second, although similar in many respects, the disclosures required in the Bulletin and the NCOIL Bill of Rights vary from each other. For example, the NCOIL Bill of Rights mandates that the disclosure contain a recommendation that the beneficiary consult a tax, investment or other financial advisor, but this disclosure is not required in the Bulletin. Third, the NCOIL Bill of Rights requires insurers to provide reports to their domestic regulators concerning their use of retained asset accounts. Among other things, these reports require disclosure of the number and dollar balance of retained asset accounts in force, a narrative description of how the retained asset accounts are structured, and the identity of any entity or financial institution that administers retained asset accounts on behalf of the insurer. The Bulletin, on the other hand, does not contain any reporting requirements. Similarly, the NCOIL Bill of Rights requires prior filing of all marketing materials, disclosure statements and supplemental contract forms utilized in connection with retained asset accounts, while the Bulletin contains no such requirement.
There are two other substantive differences between the Bulletin and the NCOIL Bill of Rights. The NCOIL Bill of Rights requires that insurers immediately return to the beneficiary any remaining balance held in a retained asset account when the account becomes inactive. The Bulletin does not have a similar requirement; the Bulletin only requires insurers to provide beneficiaries with a description of the insurer’s policy regarding retained asset accounts that become inactive. In addition, the NCOIL Bill of Rights provides that the failure to comply with its requirements shall be considered a violation of the state’s unfair trade practices statutes. The Bulletin does not enumerate any penalty for companies for violating its requirements.
A second life insurance disclosure bill has been introduced by Senator Crisco, Senate Bill 172, An Act Concerning Disclosures for Certain Life Insurance Policy Owners (“SB 172” or the “Bill”). This bill seeks to implement NCOIL’s Life Insurance Consumer Disclosure Model Act (the “Model Act”). SB 172 tracks closely the language in the Model Act. The Bill applies to individual life insurance policies held by policyholders who are sixty years of age or older, who are terminally or chronically ill, and who have requested surrender or accelerated death benefits under the policy or who have been informed by the insurer that the policy may lapse. In those cases, the Bill requires insurers to provide disclosures to the policyholder regarding the importance of life insurance as part of a broader financial plan, informing the policyholder that there are alternatives to lapse or surrender of the policy, and explaining the alternatives to lapse or surrender that are available to the insureds. The Bill provides that the Commissioner shall adopt regulations prescribing the form of the disclosure notice, and it states that the failure to comply with these requirements shall be considered an unfair insurance trade practice.
It appears that 2011 will see the enactment of enhanced disclosures for life insurers in Connecticut. It remains to be seen whether the General Assembly and the Department will be able to reconcile their approaches to the retained asset account disclosures, but the promulgation of the Bulletin and the introduction of two life insurance disclosure bills by an influential state legislator suggest that life insurers doing business in Connecticut will be dealing with important new disclosure requirements before the year is over.