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Federal Employees News Digest : Oct 14, 2013
An individual owns a life insurance policy and the insurance company refuses to pay the death benefit claim when the insured dies. This scenario is not beyond the realm of possibility as many state insurance regulators and insurance companies are scrutinizing those life insurance policies in which the policy owner names an "insurable interest" as the beneficiary. The Office of Personnel Management permits a retiring federal employee to name an insurable interest as a survivor annuitant to a CSRS or FERS annuity. OPM defines an insurable interest as a relative closer than a first cousin. According to OPM's definition, an insurable interest includes the employee's child, sibling or parent. But as will be explained below, with some additional actions and paperwork, an employee can name someone other than a relative closer than a first cousin. This column discusses who life insurance companies and OPM consider as a legitimate insurable interest. With respect to life insurance, how close of a relationship between the policy owner and an individual is "close enough" for an indi- vidual to be considered a legitimate beneficiary to a life insurance policy? Does the potential beneficiary have to be related to the policy owner---for example, a spouse, child, sibling or parent? Because individual life insurance contracts are governed by state law, the definition of an insurable interest can vary by state. In gen- eral, an insurable interest beneficiary means that the beneficiary is likely to benefit if the insured continues to live and suffer finan- cially if the insured dies. As such, not just anyone can purchase a life insurance contract on an individual's life and make himself or herself the beneficiary. Frequently the beneficiary---a parent, child, husband, wife, brother or sister---has a clear insurable interest due to a blood rela- tionship or marriage. An insurable interest can also legitimately exist in a credit-debtor or business relationship. Interestingly, depending on state law, engaged couples may not have an insur- able interest in each other's lives. The issue of who is a legitimate insurable interest became more intense in recent years because of the abuses associated with "stranger-owned life insurance" (STOLI). This type of transac- tion occurs when an investor attempts to profit from the death of an unrelated individual. In this case, an investor who clearly has no relationship or insurable interest in the insured buys a life insurance policy on an unrelated individual, pays the insurance premiums, and is named as beneficiary. Many states are prohib- iting STOLI transactions. One insurance company weeds out STOLI transactions with questions on life insurance applications that ask the policy's purpose and the intent of the policy applicant. The company is look- ing for "red flags," including investors who receive assistance with paying policy premiums, and named beneficiaries who clearly have no connection or rela- tionship with the insured. This means that financial professionals must be extra diligent in selling life insurance policies. And individuals must be wary of any insurance company or agent attempting to sell an insurance policy purely as an "investment." According to OPM, an insurable interest is pre- sumed to exist if a retiring employee names one of the following individuals as a survivor annuitant for a CSRS or FERS annuity: (1) the employee's current same-sex or heterosexual spouse; (2) a blood or adoptive relative closer than a first cousin; (3) a former spouse; (4) a person to whom the employee is engaged to be married (same- sex or opposite-sex); or (5) a person with whom the employee is living in a relationship that would constitute a common-law mar- riage in jurisdictions that recognize common-law marriages. If the person named as a survivor annuitant is not one of those individuals listed in the previous paragraph, then the employee must submit an affidavit from one or more persons with personal knowledge of the named survivor annuitant's insurable interest in the employee. The affidavit must set forth: • The relationship, if any, between the employee and the person named to receive a survivor annuity; • The extent to which that person is a dependent of the employ- ee; and • The reasons why that person might reasonably expect to derive financial benefit from the employee's continued life. The affidavit should be attached to the retirement application: CSRS/CSRS Offset - Form SF2801; and FERS - Form SF 3107. Note that unlike a spousal survivor annuity, in which the age difference between the spouses has no effect on the cost of a survivor annuity, the larger the difference in age between a CSRS or FERS annuitant and the insurable interest, the higher the cost to give an insurable interest survivor annuity. The Thrift Savings Plan does not use the insurable interest con- cept with respect to a beneficiary designation. The only concept of insurable interest that the TSP uses is for the TSP joint life annuity. A TSP account owner who opts for a TSP joint life annuity can name an insurable interest---a spouse or former spouse---as an insurable interest for the purpose of a joint TSP annuity. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor What is an 'insurable interest' for life insurance or survivor annuity purposes? October 13, 2013 Vol. 63, No. 13 7 Visit us on the Internet at www.FederalDaily.com
Oct 7, 2013
Oct 21, 2013