The Office of the Montana State Auditor has issued an advisory regarding the practice of inducing termination of death benefits through time-limited enhanced cash surrender value offers.
Montana’s advisory, issued by Commissioner Troy Downing and titled “Inducing Termination of Death Benefits Through Endorsements Offering Time-Limited Enhanced Cash Surrender Values Not Available at Policy Issuance,” highlights concerns over the potential violation of the Montana Insurance Code by a select number of life insurers.
The issue revolves around the emergence of enhanced cash surrender value offers (ECSVOs) made to policyholders via endorsements not initially contemplated at the policy’s issuance. These limited-time offers, made by entities not licensed as a life settlement company, frequently exceed the policy’s cash surrender value by a substantial amount, with the explicit aim of encouraging policyholders to surrender their policies and relinquish the associated death benefits intended for their beneficiaries.
As previously reported by Life Risk News, life insurance companies have been offering ECSVOs since around 2018. To date, insurance commissioners in nine states have issued guidance and advisories on the topic of ECSVOs.
The subsequent course of action involves urging state insurance departments to issue directives to life insurance companies, instructing them to cease issuing ECSVOs and to withdraw any previously made offers.
Nat Shapo, a Partner at Chicago law firm Katten Muchin Rosenman and whose clients include the Life Insurance Settlement Association (LISA), pointed to the ways states regulate the industry to protect consumers from the risk involved.
“LISA members have to follow those rules, beginning with getting licensed, and every transaction has a substantial regulatory overlay on top of the licensing requirements, and none of those are being followed with these offers,” Shapo told Life Risk News.
“The concern is this is mimicking regulated life settlements — without the consumer protection regulations for life settlements. It also evades life settlement laws and it’s inconsistent with life insurance laws like unfair discrimination and standard non-forfeiture law,” Shapo said.
“Once you get past the legal issues, it seems odd that life insurers would be in the business of terminating life insurance,” he said.
Life Risk News contacted the American Council of Life Insurers, the Washington, D.C.-based lobbying and trade group for the life insurance industry, for their perspective on the Montana advisory. While ACLI advocates on behalf of 280 member companies across the U.S., Whit Cornman, Director of Media Relations, declined an opportunity to provide ACLI’s perspective for this story.
In addition to Montana, eight other states have taken action regarding ECSVO offers: Louisiana, Indiana, Maryland, Oklahoma, Oregon, Pennsylvania, Virginia and Washington.
The Montana Commissioner’s office said it conducted a comprehensive review of these offers and concluded they are non-compliant with several provisions of the Montana Insurance Code. Downing’s office wrote that “of particular concern” is the issue of unfair discrimination, as outlined by state law. The code expressly prohibits any form of discriminatory treatment between individuals of the same class and with equal life expectancy, encompassing benefits payable and other contract terms and conditions.
To illustrate the concern, Commissioner Downing provided examples of actual limited-time offers reviewed by the Office of the Montana State Auditor. These included instances where surrender value increases ranged from $58,192 to $199,846 over 60 days, $4,756 to $14,682 over four and a half months, $19,037 to $360,601 over three months, and even an offer of $561,000 over just 15 days, where the original surrender value was $0.
Downing’s advisory noted: “A striking case of unfair discrimination arises when comparing two policyholders who purchase identical policies on the same day, pay equal premiums over a 20-year period, but experience vastly different outcomes.”
In one scenario described in the Montana advisory, a policyholder surrenders their policy and receives $19,037. In another, the policyholder accepts an enhanced offer the following day, resulting in a staggering $360,601. This discrepancy represents an almost 1,900% disparity in benefits received for the same premium payments, constituting a clear violation of the Montana Insurance Code, the advisory stated.
Commissioner Downing clarified that while the Office of the Montana State Auditor does not presently intend to take enforcement actions against insurers who made enhanced cash surrender value offers prior to May 5, 2023, these endorsements and offers are unequivocally in violation of state law.
In light of this advisory, Commissioner Downing says he urges all licensed life insurers, including those who have previously filed enhanced cash surrender value endorsements, to refrain from making further offers of this nature. Failure to comply with the advisory may result in regulatory action and disciplinary measures in accordance with Montana law.
The ramifications of this advisory extend beyond the borders of Montana, as the National Council of Insurance Legislators (NCOIL) had previously called upon state regulators to review similar filings for compliance with their respective laws. It is possible that more states will follow suit to ensure policyholders are protected from potential unfair practices.
“Policyholders should exercise caution and seek professional advice when evaluating any future offers they receive, empowering them to make informed decisions regarding the surrender of their policies,” the Montana advisory concluded.
