The Internal Revenue Service has just issued new guidance about 419(e) welfare benefit plans funded with life insurance. It appears the federal agency intends to crack down on 419(e) single-employer plans.
In response, a couple of insurance companies have already put out position papers, signaling they are not going to take any more single-employer business.
There is precedent for this. A few years ago, multiple employer trusts were used in 419 plans–before the IRS shut them down. Likewise, the investor-owned/stranger-owned life insurance business boomed at first–only to be shut down by companies and regulators worried about people selling their insurability to investors.
Those are problems created by producers who focus more on finding loopholes to sell life insurance than on meeting insurance needs. But certain insurers have problems that need addressing, too. These are what may be called problems of carrier product integrity. Consider the following examples:
o Some insurers have specialty products that are designed only for term conversions. These products aren't generally sold; they are just used for conversions.
The problem: Why are the costs on these specialty contracts higher than on other similar contracts? Do customers know about these differences? Does the producer? And should this information be disclosed by the issuing company at time of the term sale?
o Some companies have developed life insurance contracts that can be dialed down or blended with a term-like rider.
The problem: The producer may not offer such a product, even if the customer would be better off, because these contracts typically pay lower commission than a full permanent contract. (That is, the current and guaranteed insurance charges and expenses are exactly the same as the base contract, but at the expense of lower producer commission.)
o Some companies have developed life products that illustrate with very competitive non-guaranteed values–values that greatly "beat" the non-guaranteed illustrated values of a competitor, or groups of competitors.