Life Insurance Regulations: Who's In Charge?

Life insurance is a legal contract between an individual and an insurance company, where the insured pays regular premiums to the company, and in return, the company provides a financial safety net for their loved ones after they die. Variable life insurance is a type of permanent life insurance that combines life coverage with an investment component. The regulation of variable life insurance is handled by several key entities, including the Department of Insurance and/or Financial Services, the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA). These regulatory bodies ensure that insurance companies operate within the legal framework, protect consumer rights, and ensure transparency and fairness in the financial markets. The U.S. Department of Treasury does not directly regulate variable life insurance, as its focus is primarily on broader financial systems.

Department of Insurance

The Department of Insurance is a state-level agency that oversees the insurance industry, ensuring that companies operate within legal frameworks and protect consumer rights. The department's primary role is to regulate the insurance marketplace, ensuring that insurance companies comply with state laws and protect consumers. For example, the North Carolina Department of Insurance encourages citizens to plan for natural disasters to protect their families and recover from such events.

The Department of Insurance is one of the key entities that regulate variable life insurance, a type of permanent life insurance product that combines life coverage with an investment component. Variable life insurance is regulated by several entities, including the Department of Insurance and/or Financial Services, the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA).

The Department of Insurance ensures that insurance providers comply with state laws and protect the interests of consumers. It is primarily focused on the oversight of the insurance industry, while the SEC and FINRA are responsible for regulating the investment components of variable life insurance products.

The Department of Insurance's role in regulating variable life insurance is distinct from that of the U.S. Department of Treasury, which does not directly oversee insurance products. The Department of Treasury's focus is largely on the broader financial system, including tax regulations and the issuance of government debt, rather than direct insurance regulation.

In addition to its regulatory responsibilities, the Department of Insurance may also provide consumer assistance and education. For instance, the North Carolina Department of Insurance assists consumers with insurance claims and provides information to help individuals make informed decisions about insurance-related issues. Similarly, the Michigan Department of Insurance and Financial Services (DIFS) offers consumer protection, outreach, and financial empowerment and education services to Michigan residents.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a federal government regulatory agency that is responsible for regulating the securities markets and protecting investors. The SEC was founded in 1934 as a response to the stock market crash of 1929 and the subsequent Great Depression. It is an independent agency that operates under the authority of federal laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Sarbanes-Oxley Act of 2002.

The SEC has several key roles and responsibilities. Firstly, it interprets and enforces securities laws, issues new rules, and coordinates regulations among different parts of the government. Secondly, it ensures that companies provide accurate and complete disclosures about significant financial events, such as corporate takeovers, and that investors are provided with material information to make informed investment decisions. Thirdly, the SEC brings civil action against those who break securities laws or regulations and refers criminal cases to the U.S. Department of Justice (DOJ). Fourthly, it approves registration statements for bookrunners among underwriting firms, and all securities offered in the U.S. must be registered with the SEC before being sold to investors. Finally, financial services firms such as broker-dealers, advisory firms, asset managers, and their representatives must register with the SEC to conduct business.

In the context of life insurance, the SEC is particularly relevant to variable life insurance products, which include investment elements. Variable life insurance policies offer contract owners various investment options, such as stocks, bonds, mutual funds, and other market-based assets, which can potentially increase the cash value of their policies. The SEC regulates these financial products to ensure transparency and fairness in the securities markets. It ensures that the investments are conducted transparently and that the contract owner receives accurate information about their investment options. The SEC also regulates the advertising and sales literature used by broker-dealers in the context of variable life insurance, although the specific guidelines for performance data in this context are still being developed.

Overall, the SEC plays a crucial role in regulating the financial markets and protecting investors, including those who invest in variable life insurance products. By enforcing securities laws and promoting transparency, the SEC helps to maintain fair and efficient markets and protect investors from fraudulent or manipulative practices.

Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority (FINRA) is an independent, non-governmental regulatory body that supervises the conduct of its members, subject to the oversight of the Securities and Exchange Commission (SEC). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) and the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE).

FINRA is responsible for regulating member brokerage firms and exchange markets, including the sale of variable life insurance as it pertains to investments. It is the largest independent regulator for all securities firms doing business in the United States, with a mission to protect investors by ensuring the industry operates fairly and honestly. As of 2023, FINRA oversaw almost 3,300 brokerage firms, more than 148,700 branch offices, and approximately 628,392 registered securities representatives.

FINRA writes and enforces rules that govern registered brokers and broker-dealer firms in the United States. It also administers qualifying exams for securities professionals, such as the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination. FINRA's regulatory exams cover topics such as manipulative trading, fixed income, financial crimes, cybersecurity, and complex products.

FINRA also provides resources for investors, such as BrokerCheck, a searchable database that allows investors to look up information on brokers, investment advisors, and financial advisors. This includes certifications, education, and any enforcement actions taken against these individuals. FINRA's Investor Education Foundation offers investors personal finance and investment information, courses, research, and tools to help them make informed decisions.

In addition, FINRA has expanded its regulatory scope to include crypto asset-related activities of member firms and associated persons, demonstrating its adaptability to evolving financial trends.

U.S. Department of Treasury

The U.S. Department of the Treasury does not directly regulate life insurance products. Its role is more focused on broader financial systems and economic policy, including tax regulations and the issuance of government debt. The Department of the Treasury's Federal Insurance Office (FIO) monitors the insurance sector, underserved communities' and consumers' access to affordable non-health insurance products, and represents the U.S. on international insurance matters.

The Department of the Treasury has issued guidance, alongside the Internal Revenue Service, on the source of income received by foreign persons and residents of Puerto Rico from life insurance and annuity contracts issued by U.S. companies. This guidance clarifies that income from such contracts constitutes U.S.-source income, regardless of whether the contract is issued by a U.S. company's foreign or Puerto Rican branch.

While the U.S. Department of the Treasury does not directly oversee insurance products, its regulations can impact tax implications for insurance policies. For example, certain payments received under an annuity contract and amounts withdrawn from the cash value of a life insurance contract are considered income for the recipient.

In summary, the U.S. Department of the Treasury is primarily focused on broader financial matters, including tax regulations, rather than the direct regulation of life insurance products. However, its policies and guidance can still impact the taxation of insurance contracts.

State-level agencies

The Department of Insurance and/or Financial Services is a key state-level agency that regulates the insurance marketplace. It ensures that insurance companies operate within the legal framework and comply with state laws, while also protecting consumer rights. This department plays a crucial role in overseeing the insurance industry and maintaining a fair and transparent marketplace for consumers.

In addition to the Department of Insurance, several other state-level entities may be involved in regulating specific aspects of life insurance. For example, the Securities and Exchange Commission (SEC) regulates the investment components of variable life insurance products, ensuring transparency and compliance to protect investors. The Financial Industry Regulatory Authority (FINRA), another state-level entity, oversees brokerage firms and exchange markets, ensuring fair and transparent sales of variable life insurance policies with investment options.

It is important to note that while state-level agencies play a primary role in regulating life insurance, there may also be federal involvement in certain cases. For example, self-insured health benefits provided by private employers are typically governed by federal law, such as the Employee Retirement Income Security Act (ERISA). Additionally, the federal government has the authority to execute laws and regulations related to insurance, including those proposed through the "notice and comment rulemaking" process.

Furthermore, at the state level, departments of financial services play a crucial role in regulating various aspects of life insurance. These departments provide definitions and guidelines for different terms and practices related to life insurance. They offer glossaries and explanations for policyholders to understand key concepts, such as agents, direct response, disclosure statements, dividends, evidence of insurability, and more. These departments also outline different types of policies, such as single premium life insurance, modified life plans, family policies, and joint life and survivor insurance, helping policyholders make informed decisions.

Frequently asked questions