One of the 45 chapters in the new edition of the New Appleman Insurance Law Practice Guide is "Understanding Life Insurance" by Richard J. Cohen and Daniel W. Gerber of Goldberg Segalla LLP.
Section 34.07 of that chapter considers the influence of federal regulation on insurance. It is true that matters concerning the way an insurance company operates its insurance business are regulated by state, not federal, law. But when an insurance company engages in business other than insurance, federal law may apply. For instance, federal securities laws apply to the registration and sale of corporate securities issued by insurance companies. Questions thus arise as to instruments that mix investment and insurance as to whether they should be treated as life insurance policies or investment securities.
Against this background, the authors consider variable annuities, which are annuity products that feature a separate investment account that must be segregated by the insurer as a matter of law for the variable annuity policyholders. This account may consist of stocks, bonds, certificates of deposit, or some mixture of these assets. The value of the policyholder's annuity can vary with gains and losses as well as with dividends and interest income. Accordingly, the SEC has ruled that variable life insurance policies are generally securities. However, in examining an apparent variable annuity, the Seventh Circuit held it was not subject to federal regulation as a security. The court reasoned that because the annual variable-rate declaration was made prior to each year's renewal date, the instrument most resembled a fixed annuity in which the purchaser bore little or no risk.
The authors conclude, "It is critical ... to identify the applicable investment vehicle and what laws may apply." The authors proceed to identify the potential consequences of these determinations.
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