Michigan Insurable Interest, Consent and Variable Products

Two Michigan rules decide whether a life sale can go forward before price is discussed: who may insure whose life, and, for variable products, who may sell them and what the buyer must receive first. Insurable interest and consent come from chapter 22 of the Insurance Code. Variable products are governed by R 500.621 to R 500.641, R 500.841 to R 500.866 and the current DIFS bulletin on the variable line of authority. Older rule text says “commissioner.” The Director of the Department of Insurance and Financial Services (DIFS) holds that authority now.

Insurable Interest in Michigan

A buyer who insures another person’s life needs an insurable interest in it. Michigan writes several particular interests into statute.

Family. A husband may insure his life for his wife’s benefit, and a father may insure his life for his children. The proceeds are payable to the persons the insurance was bought for, free from the claims of the insured’s creditors, and proceeds of life or endowment insurance payable to the insured’s wife, husband or children, or to a trustee for them, including the cash value, are exempt from execution or liability to any creditor of the insured (MCL 500.2207(1)).

Beneficiaries and creditors. When a policy is effected in favor of someone other than the insured, the lawful beneficiary or assignee is entitled to the proceeds and cash value against the creditors and representatives of the insured and of the person who bought the policy, whether or not the right to change the beneficiary is reserved (MCL 500.2207(2)). The exception is fraud on creditors. Premiums paid with intent to defraud creditors, with interest, go to the creditors from the proceeds. Proof that a transfer was made while a particular debt existed is prima facie evidence of that intent. The insurer is discharged by paying as the contract provides unless it first has written notice of a creditor’s claim at its home office.

Employers and trusts. An employer, or a trust it established, has an insurable interest in, and may insure with the insured’s written consent, the employer’s directors, officers, managers, nonmanagement employees and retired employees (MCL 500.2210(2)). For nonmanagement and retired employees the coverage must also be limited to an amount reasonably commensurate with the employer’s projected unfunded liabilities to them for employee benefit plans, calculated by accepted actuarial principles. A trust maintained to fund employee benefit plan costs has a second route for nonmanagement and retired employees that works by notice: the person must be notified in writing and must not have objected in writing, and the same cap applies (MCL 500.2210(3)). Neither may retaliate against an employee who refuses (MCL 500.2210(2), (3)). Proceeds under either subsection are exempt from the claims of any creditor or dependent of the insured (MCL 500.2210(4)).

Trustees and charities. A trustee has an insurable interest as provided in section 7114 of the estates and protected individuals code (MCL 500.2210a). A charity qualified under section 501(c)(3) of the Internal Revenue Code has an insurable interest in the life of an individual who gives written consent to the ownership or purchase of a policy on his or her life (MCL 500.2212).

Minors. A person between 16 and 18 may make a life or disability insurance contract for his or her own benefit, or for a parent, spouse, child, brother or sister, and may surrender it, with the same effect as an adult (MCL 500.2205).

Written Consent

MCL 500.2211(1) says an individual with an insurable interest in another human being’s life shall not insure that life for the individual’s own benefit unless the person whose life is to be insured consents in writing. That person’s signature on the application is the consent. The rule applies to life insurance policies and certificates of $10,000 or more, and it does not apply when the person to be insured is under 18 (MCL 500.2211(2)).

Three cases show how it works.

1. A buy-sell policy. Joan Pruett and her partner Dev Anand each buy $250,000 on the other to fund a buy-sell agreement. Each has a financial interest in the other’s life, and each policy is $10,000 or more, so each insured must consent in writing. Dev’s signature as the proposed insured on Joan’s application is the consent. If Joan signed his name, there is no written consent from Dev as the statute requires.
2. A child. A father insures his 9-year-old daughter for $50,000. She is under 18, so the consent rule does not apply.
3. A small policy. A woman buys an $8,000 policy on an adult friend who owes her money. The amount is under $10,000, so MCL 500.2211 does not reach it. Insurers commonly still ask for the insured’s signature as underwriting practice, but the statute does not require it at this size.

Sidenote

Where the Consent Rule Stops

MCL 500.2211 is limited by amount ($10,000 or more) and by the insured’s age (18 or older). Employer, trust and charity interests carry their own consent terms in MCL 500.2210 and 500.2212.

Variable Products Under Michigan Law

A variable life policy or variable annuity is insurance under Michigan law and a security under federal law. The DIFS bulletin on the variable line says variable life insurance contracts and variable annuities “are considered insurance products and regulated as such, despite their status as securities under federal law.” A producer answers to the Director on the insurance side and to the SEC and FINRA, the self-regulatory organization for broker-dealers and registered representatives, on the securities side.

Who May Sell

Variable life and variable annuities are a separate line of authority, issued since April 4, 2008 under MCL 500.1206(1)(e). DIFS Bulletin 2018-24-INS, which replaced earlier bulletins on the subject, sets the requirements. An applicant for the line, resident or nonresident, must first register or be registered with FINRA and have passed the Securities Industry Essentials (SIE) exam and either the Series 6 or Series 7 exam. A resident must also pass the Michigan variable annuities examination. Prelicensing education is not required, but continuing education under MCL 500.1204c applies. A producer who also sells non-variable life insurance needs the life line as well.

An insurance agency may apply without FINRA registration only if it has an insurance networking arrangement with a registered broker-dealer that meets the conditions of an SEC staff no-action letter, and it submits the arrangement to DIFS with a notarized attestation.

R 500.866 adds duties for anyone selling variable life. The producer files evidence of any required securities license, and immediately reports to the Director any license suspension or revocation in another state, any securities sanction, and any judgment or injunction based on fraud, deceit, misrepresentation or violation of an insurance or securities law (R 500.866(a), (c)).

Suitability and Delivery of the Prospectus

An insurer’s filed suitability standards bind it and the agents they refer to. They must say that no recommendation may be made, and no variable life policy issued, without reasonable grounds to believe the purchase is suitable, based on information from a reasonable inquiry about the applicant’s insurance and investment objectives, financial situation and needs (R 500.844(1)). Suitability means the purchase is reasonably consistent with the applicant’s expressed objectives, the needs a professional agent determines after reasonable inquiry, and the likelihood the applicant will keep the policy long enough for the insurer’s acquisition costs to be amortized over a reasonable period (R 500.844(2)). Age, earnings, marital status, dependents, savings and assets, and the current life insurance program are all considered (R 500.844(3)).

The applicant must receive the required information, and acknowledge receipt in writing, at or before the time the application is executed. Delivering an effective SEC prospectus satisfies the rule to the extent it contains the information (R 500.863). The information includes:

• A nontechnical summary of the policy’s principal features, including how variable benefits follow the separate account, and the free look and exchange notices.
• The separate account’s investment policy and restrictions, and its net investment return for each of the last 10 years it existed.
• Charges levied against the account in the prior year, how its assets are valued, and the federal income tax treatment for the insured, owner and beneficiary.
• Illustrations that do not project past investment experience into the future. Hypothetical assumed rates are allowed if made clear as hypothetical (R 500.863(g)).

The application must say prominently that the death benefit may be variable or fixed under specified conditions and that cash values may rise or fall with separate account experience, and it must ask questions that let the insurer judge suitability (R 500.864).

Illustrations

A sales illustration for variable life must (R 500.845a):

• Use hypothetical rates that would actually be credited after taxes, management fees and contract charges.
• Include one illustration based solely on the policy’s guarantees, reflecting maximum mortality and administrative charges.
• State after the table that hypothetical results do not represent actual results and that actual values will differ.
• Disclose transaction charges and be printed on paper. A screen display may add to the paper copy but not replace it.

The insurer files advertising and illustrations with the Director at least 30 days before use, unless exempted in writing, and they are subject to MCL 500.2005 and 500.2007. An illustration that projects past investment results forward or predicts future results violates those sections (R 500.631(1), (2)).

What the Policy Must Contain

A variable life policy carries a prominent cover statement that the death benefit may be variable or fixed and cash values may rise or fall. Michigan’s required terms (R 500.850, R 500.851) include:

• Free look. The policyholder may return the policy for a refund of all premiums within 45 days of signing the application or 10 days after receiving the policy, whichever is later (R 500.850(a)(iv)).
• Exchange. For scheduled premium policies, the owner may exchange the policy during the first 18 months, so long as premiums are duly paid, without evidence of insurability, for permanent fixed benefit insurance with the same initial amount (R 500.850(f)).
• Grace. Scheduled premium policies have at least 31 days. A flexible premium policy enters grace when charges exceed the amount available, and grace ends not less than 61 days after the insurer mails the required report (R 500.850(b), (r)).
• Reinstatement and incontestability. Reinstatement within 2 years of default for scheduled premium policies, and incontestability after 2 years during the insured’s lifetime (R 500.850(c), (m)).
• Deferral. Variable death benefits above the minimum, cash values, loans and withdrawals may be deferred up to 6 months only for values not dependent on separate account performance, or while the New York Stock Exchange is closed, other than normal holidays, or the SEC finds an emergency (R 500.850(o)).
• Loans. Available after 3 full years, at not less than 75% of cash surrender value (R 500.851(b)).

A suicide exclusion for 2 years from issue is permitted, not required (R 500.852(a)).

The assumed investment rate, or AIR, is the net return that would keep the variable death benefit equal to the death benefit the plan would pay if it did not vary (R 500.841(c)). Take a scheduled premium policy with an initial face amount of $100,000 and an AIR of 4%. In a typical design the death benefit moves each year by the ratio of the actual return to the AIR. Starting from $100,000, a net return of 8% gives 1.08 divided by 1.04, about 1.0385, and a death benefit of about $103,846. A net return of negative 10% gives 0.90 divided by 1.04, about 0.8654, and about $86,538. A scheduled premium policy must provide a minimum death benefit at least equal to its initial face amount if premiums are paid when due (R 500.849(b)), so with premiums paid and no policy loan, the insurer pays $100,000 in the second case. Death benefits are redetermined at least annually and cash values at least monthly (R 500.849(e), (f)).

Variable Annuities

A variable annuity contract states on its first page, prominently, that benefits and values are on a variable basis and will decrease or increase with investment experience (R 500.628). An individual contract provides a default option that includes a paid-up annuity, and its annual net investment increment assumption may not exceed 5% unless the Director approves (R 500.629(1)(a), (c)). The insurer discloses in writing, before or at delivery, the actual or maximum yearly investment management charges (R 500.629(2)). A variable annuity’s free look refund is the premiums not allocated to the separate account plus the account value on the date the contract is received (MCL 500.4073(2)).

Lesson summary

• Michigan writes particular insurable interests into law, including family, employers, trusts and 501(c)(3) charities. Beneficiary proceeds are generally exempt from the insured’s creditors, except premiums paid with intent to defraud creditors.
• Under MCL 500.2211, an individual who insures another person’s life for the individual’s own benefit needs that person’s written consent. The signature on the application counts. The rule applies to policies of $10,000 or more and not to insureds under 18.
• An employer insuring nonmanagement or retired employees needs each person’s written consent and must keep the amount reasonably tied to its unfunded employee benefit liabilities.
• Variable life and variable annuities are a separate Michigan line of authority requiring FINRA registration, the SIE exam and Series 6 or Series 7 under the DIFS bulletin, plus the Michigan variable annuities exam for residents.
• Variable life requires a suitability inquiry, delivery of the required information or prospectus with written acknowledgment at or before application, and illustrations that never project past investment results forward.
• Michigan’s variable life free look runs 45 days from application or 10 days from receipt, whichever is later, and scheduled premium policies carry an 18-month exchange right to permanent insurance.
• A scheduled premium variable life policy guarantees a minimum death benefit equal to its initial face amount if premiums are paid, while the variable death benefit follows the separate account against the assumed investment rate.