Lien And Life Insurance: Can You Get Covered?

Life insurance is a financial product that provides financial support to the dependents of the insured in the event of their death. There are several types of life insurance products available, including term life, whole life, and universal life insurance. Some life insurance policies are considered securities and must be registered with the Securities and Exchange Commission (SEC) and regulated by the Financial Industry Regulatory Authority (FINRA). To sell these variable life insurance products, insurance agents must be licensed as registered financial professionals and comply with FINRA rules. Before purchasing a life insurance policy, it is important to understand the different types of policies, their features, and their potential risks and benefits.

Variable life insurance policies are considered securities and must be registered with the SEC

Variable life insurance is a type of security that offers fixed premiums and a minimum death benefit. The cash value of a variable life insurance policy is invested in a portfolio of securities, typically mutual funds, rather than being held as a fixed amount. This means that the policy's investment return is not guaranteed, and the cash value will fluctuate over time. Policyholders can choose a mix of investments from those offered by the insurance company, allowing them to build value over time. However, this also means that there is a risk of losing money, including the initial investment, if the selected investment options perform poorly.

Due to the investment component, variable life insurance policies fall under the jurisdiction of the SEC and must be registered with them. This registration requirement ensures that investors are provided with important information about the policy's fees, expenses, investment options, death benefits, and other features. It also enables the SEC to regulate the sale and marketing of these policies, protecting consumers from potential fraud or misconduct.

In addition to SEC registration, the sale of variable life insurance policies is also regulated by the Financial Industry Regulatory Authority (FINRA). FINRA has jurisdiction over the investment professionals and firms that sell variable life insurance policies, ensuring compliance with relevant laws and regulations.

It is important to note that not all life insurance policies are considered securities. Term life insurance and whole life insurance policies, for example, are regulated by state insurance commissioners and do not need to be registered with the SEC. However, variable life insurance and variable universal life insurance, which introduce investment elements, are classified as securities and are subject to SEC and FINRA oversight.

When considering the purchase of a variable life insurance policy, it is essential to understand the associated risks and fees. Prospective policyholders should carefully review the policy prospectus, seek guidance from financial professionals, and ensure that the policy aligns with their insurance needs, investment goals, and tax situation.

FINRA has jurisdiction over the investment professionals and firms that sell insurance products that are securities

The Financial Industry Regulatory Authority (FINRA) is an independent, non-governmental organisation that creates and enforces rules governing registered brokers and broker-dealer firms in the United States. It was formed in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE). FINRA's stated mission is "to safeguard the investing public against fraud and bad practices". It is considered a self-regulatory organisation.

FINRA has jurisdiction over the sale of insurance products that are classified as securities. These include variable life insurance and variable universal life insurance. Variable life insurance is a type of security that offers fixed premiums and a minimum death benefit. The cash value of variable life insurance is invested in a portfolio of securities, which the policyholder can choose. However, the investment return is not guaranteed and the cash value will fluctuate. Variable universal life insurance combines the features of universal life insurance and variable life insurance, offering flexible premium payments, insurance coverage, and an investment account.

If an insurance agent offers products that are considered securities, such as variable life insurance policies, they must be licensed as registered financial professionals and comply with FINRA rules. This ensures that investors are protected from potential abuses and unethical conduct within the financial industry. FINRA provides resources such as BrokerCheck, which allows investors to verify the registration and standing of brokers.

In addition to its regulatory role, FINRA also administers qualifying exams for securities professionals, including the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination. These exams must be passed by individuals who wish to sell securities or supervise others who do. FINRA has the authority to take disciplinary action against registered individuals or firms that violate its rules, including fines, expulsion, and suspension.

Life insurance policies can be exchanged for another new policy, but you might lose out financially

Firstly, the old insurance policy must be directly exchanged for a new policy. You cannot receive a cheque and then use that money to purchase a new policy. Additionally, you can only make a tax-free exchange from a life insurance policy to another life insurance policy or from a life insurance policy to an annuity. You cannot exchange an annuity contract for a life insurance policy.

There are several reasons why a policyholder might want to exchange their existing policy for a new one. For example, their reasons for purchasing life insurance may have changed over time, or their health may have improved, resulting in lower insurance costs. They may also have concerns about the solvency of the original insurance company or the service provided by the investment professional. A new policy may also offer more desirable features or benefits.

However, there are also potential drawbacks to exchanging an existing policy. One of the main risks is reducing the cash value built up in the original policy. This can happen when a portion of the accumulated amount is applied to the new policy's first-year expenses, including commissions. Early surrender charges in life insurance policies (excluding term policies) can further reduce the cash value available for the new policy. Additionally, the policyholder's health may have declined since purchasing the current policy, resulting in higher premiums for the new one.

Another important consideration is the new contestability period that comes with a new policy. During this two-year period, the insurance company has the right to challenge a death claim based on misstatements in the application. Furthermore, surrendering an existing policy may trigger unfavourable tax consequences, such as taxes on outstanding policy loans.

Before making the decision to exchange a life insurance policy, it is crucial to carefully evaluate all the options and consider the potential risks and benefits. It is important to remember that the exchange should be in the best interest of the policyholder and not just the person selling the new policy.

Insurance agents who offer products that are considered securities must be licensed as registered financial professionals

Insurance Agents and Securities Licensing

Insurance agents are salespeople who help individuals and businesses obtain various insurance policies, including life, health, or property insurance. To sell insurance, an agent must be licensed by their state's insurance commission. However, certain insurance products are considered securities, and to offer these products, an agent must also be licensed as a registered financial professional.

Variable life insurance and variable annuities are examples of insurance products that are considered securities. These products have an investment component, allowing the policyholder to choose from various investment options. As a result, they are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

• Expanded Service Portfolio: A securities license allows agents to offer a broader range of products and services, including insurance products with an investment component and non-insurance products like retirement planning.
• Competitive Advantage: With a securities license, agents can stand out in a competitive marketplace by offering a wider range of financial products and services, becoming a one-stop shop for their clients' financial needs.
• New Revenue Streams: By offering securities products, insurance agents can increase their revenue and build stronger, longer-lasting relationships with their clients.
• Enhanced Advisor Role: A securities license enables agents to become more valuable advisors to their clients, providing a full range of insurance and investment options to meet their current and future financial needs.
• Retaining Clients: Without a securities license, agents may need to refer clients elsewhere for certain products, potentially losing business. A securities license allows agents to keep these conversations in-house and offer a comprehensive suite of financial products and services.
• Legal Standing: Advising clients on areas where one is not licensed can lead to legal issues. A securities license ensures agents can provide advice across a broader spectrum of financial products while remaining compliant with regulations.

How to Obtain a Securities License

To sell variable life insurance, for example, an agent would need to obtain a Series 6 or Series 7 license from FINRA, in addition to their state-issued life insurance license. This requires passing a comprehensive exam covering various aspects of securities regulations.

Variable life insurance is regulated by the SEC and FINRA

Variable life insurance is a type of security that offers fixed premiums and a minimum death benefit. Unlike whole life insurance, the cash value of variable life insurance is invested in a portfolio of securities. Policyholders can choose a mix of investments from those the policy offers. However, the investment return is not guaranteed, and the cash value will fluctuate. Variable life insurance is often more complex and costly than other policies and comes with a certain amount of risk.

Variable life insurance is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This is because variable life insurance is considered a security, which means the contracts must be registered with the SEC, and sales must be regulated by FINRA.

FINRA has developed rules to enhance firms' compliance and supervisory systems and provide more comprehensive and targeted protection to investors who purchase or exchange variable life insurance policies. For example, Rule 2330 establishes sales practice standards, requiring that a registered representative recommending a variable life insurance policy must reasonably believe the customer has been informed of the various features of this type of policy, such as potential tax penalties, various fees and costs, and market risk.

Additionally, FINRA Rule 2210 sets standards governing communications with the public about variable life insurance. These standards require that retail communications and correspondence clearly describe the product as a variable life insurance policy and include specific considerations, such as a balanced discussion of the insurance and investment features of the product.

Variable life insurance is a complex product, and it is important for investors to understand the risks and features before purchasing.

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