A federal judge in Rhode Island last week issued a ruling that raised questions as to whether life insurers can rely on state insurable interest laws to void sales of stranger-originated annuities.
In suits brought by Western Reserve Life Assurance Co. of Ohio and Transamerica Life Insurance Co. against broker-dealers and an estate planning attorney, the carriers alleged that the defendants had paired investors with terminally ill individuals whose variable annuities provided a guaranteed death benefit. The annuitants were paid to participate in the plan under which annuities were issued in their names, but the premiums were paid for by investors. Under the terms of the annuity, if the annuitant died, his or her beneficiaries would be entitled to receive the principal originally invested, even if the underlying investments had decreased in value. Variable annuities are often sold as retirement-savings vehicles as the amounts contributed are invested in securities and the value grows over time on a tax-deferred basis. Upon retirement, an annuitant can withdraw the principal and convert it into a stream of lifetime annual payments or leave it for her heirs. In the alleged scheme, the investors purportedly used a longer-term investment product for short-term gain.
In the arrangement challenged in Rhode Island, the carriers claimed the annuities should be declared void because the beneficiaries, who were unrelated to the annuitants, had no insurable interest in their continued lives. The judge distinguished the annuities from life insurance policies, holding that no insurable interest was required for these annuities and that the marketing materials for the product presented the death benefit as “an ancillary perk,” not as a central feature. While dismissing the carriers’ claims for rescission, the judge let stand certain fraud, conspiracy and other claims against the defendants. The decision represents a setback for life insurance companies, but its ultimate precedential impact is unclear. (Western Reserve Life Assurance Co. of Ohio v. Conreal LLC, et al. (U.S.D.C., District of Rhode Island, C.A. No. 09-470 S.))