MEMORANDUM. Pollock Financial Group Life Insurance Proposal to Pasco County School Board Background Information

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1 MEMORANDUM TO: FROM: Belinda Miller, General Counsel Alyssa S. Lathrop, Assistant General Counsel DATE: June 11, 2014 RE: Pollock Financial Group Life Insurance Proposal to Pasco County School Board Background Information Below is a summary of the background information that has been found to date with respect to the individuals involved in marketing the life insurance proposal to the Pasco County School Board: Rene Stuifzand, Mark Pollock, and William Bill Olive. All sources are publicly available and are hyperlinked where possible. RENE STUIFZAND Rene Stuifzand was introduced by William Bill Olive to the Pasco County School District as the architect of this entire program. Mr. Olive s included an attachment that described Mr. Stuifzand s employment history, listing Mr. Stuifzand as, among other things, having been President and Chief Executive Officer of Concord Capital and a Partner of InsCap Management, LLC. 1 Mr. Stuifzand is not licensed as an insurance agent in the State of Florida. 2 a. FINRA Report and Resignation from InsCap Capital Markets, LLC According to the Financial Industry Regulatory Authority s (FINRA) 3 BrokerCheck, 4 Mr. Stuifzand was previously a registered securities broker with InsCap Capital Markets, LLC from December 2005 through June Mr. Stuifzand was Permitted to Resign from InsCap Capital Markets, LLC on May 29, The following allegations were reported to FINRA: BASED ON THE INTERNAL REVIEW, THE COMPANY BELIEVES THAT MR. STUIFZAND MAY HAVE BEEN AWARE OR SHOULD HAVE BEEN AWARE OF THE SUBMISSION OF FORGED DOCUMENTS TO THE FACILITY LENDER IN CONNECTION WITH THE CREATION AND FUNDING OF A PARTICULAR CLIENT S TRUST WITHOUT THAT 1 Bill Olive to Kevin Shibley, Christine Pejot, & Raymond Gadd (Apr. 11, 2014). 2 To search for licensed insurance agents in Florida, go to 3 FINRA is an independent, not-for-profit organization authorized by Congress to protect America s investors by making sure the securities industry operates fairly and honestly. 4 BrokerCheck is a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives. BrokerCheck information is drawn from filings by regulators, firms and investment professionals. It includes current licensing status and history, employment history and, if any, reported regulatory, customer dispute, criminal and other matters. Page 1 of 6

2 PARTICULAR CLIENT S CONSENT. MR. STUIFZAND DENIES ANY WRONGDOING IN CONNECTION WITH THE FOREGOING. BASED ON THE INTERNAL REVIEW, THE COMPANY ALSO BELIEVES THAT MR. STUIFZAND WAS INVOLVED IN MAKING REPRESENTATIONS TO AN INSURER IN CONNECTION WITH FEES CHARGED TO CLIENTS. Mr. Stuifzand does not currently have a FINRA broker license. Source: (search for Rene Stuifzand ). For the above quote regarding the allegations, click on Get Detailed Report. b. Subsequent Lawsuits Fifth Third Bank v. Concord Capital Management, et al., Case No L , Cook County, Illinois. Mr. Stuifzand was named as a defendant in a lawsuit filed by Fifth Third Bank on June 11, The docket for the case also lists numerous other defendants, including Concord Capital Management, Concord Capital Insurance, Robert Thompson, Ira Brody, Concord Capital Funding, Gary Brecka, Santa Maria Overseas Ltd., Bank of America, MT Bank Corporation, Inscap Partners LLC, Carl Meyer, Edward Netherland, Finbar Quinn, Lasalle Bank NA, Wilmington Trust Company, Matthew Ross, Robert Stuifzand, Concord Partners LLC, Rita Hill, Norman Caldwell, Harish Raghavan, Inscap Insurance Service, Inscap Management LLC, and Columbus Nova Investment. 5 According to the docket, Mr. Stuifzand filed an answer to the complaint on January 25, 2011, and an Amended Complaint was filed on November 22, The case is currently on-going. Concord Capital Management, LLC, et al. v. Fifth Third Bank, et al., Case No , New York County, New York. On September 14, 2010, Concord Capital Management, LLC (f/k/a InsCap Management, LLC), Concord Partners, LLC, Concord Capital Funding, LCC, and Concord Capital Funding, Inc., filed a complaint against Fifth Third Bank, Bank of America, and Ira L. Brody. 6 The complaint alleged a shocking scheme, involving fraud, forgery, and bribery, in which a renegade group of executives of Concord (the Insiders ), a life insurance premium finance company aided and abetted by Concord s bank, defendant Fifth Third looted the assets of Concord. Complaint, page 2. The complaint alleged that Brody and the Insiders implemented their fraudulent scheme by, among other things, falsifying loan documentation and manipulating collateral valuations. Complaint, page 3. The complaint further alleged that [a]s a result of the looting and bogus loans generated by the Concord 5 Docket, Fifth Third Bank v. Concord Capital Management, et al., Case No L , Circuit Court, Cook County Illinois, &SearchType=0&Database=2&case_no=&PLtype=2&sname=Concord+Capital+Management&CDate. 6 Complaint, Concord Capital Management, LLC v. Fifth Third Bank, Case No , Supreme Court of New York, County of New York (filed Sept. 14, 2010), available at =prod. Page 2 of 6

3 executives, Concord lost hundreds of millions of dollars, and its business was destroyed. Complaint, page 2. Subsequently, an affidavit filed by the plaintiffs attorney in support of the plaintiffs efforts to depose Mr. Stuifzand asserted as follows: Stuifzand was previously employed as Chief Operating Officer of Concord Capital Management, LLC. He has been identified as one of the renegade officers responsible for the fraud perpetrated against Plaintiffs. Affidavit, page 2. 7 On September 19, 2011, the court entered an order directing a subpoena to be served upon Mr. Stuifzand as a non-party witness. 8 The lawsuit was dismissed against defendants Bank of America and Fifth Third Bank on December 1, 2011, on the basis of in pari delicto, a doctrine that bars wrongdoers from recovering for losses arising from their own misconduct. Order, pages & 19. The action was continued against the remaining defendant, Ira L. Brody. Order, page On August 8, 2012, discovery in the case was stayed pending completion of discovery in a related action entitled Fifth Third Bank v. Concord Capital Management, LLC, et al., pending in Illinois Circuit Court, Cook County, under Case No L Order, page 1. The order staying the case stated: In Illinois, Fifth Third Bank, which the court dismissed from the New York litigation as a defendant on the grounds of in pari delicto, seeks collection of amounts owed under a loan agreement and two promissory notes in the amount of $23 Million. Plaintiffs here have counterclaimed in the Illinois litigation, alleging that Fifth Third Bank participated in the fraudulent scheme outlined in the New York complaint. Order, page The case is currently stayed. 11 Concord Capital Management f/k/a InsCap Management, LLC v. Rene Stuifzand, Case No , New York County, New York. According to a complaint filed on July 26, 2011, by Concord Capital Management, LLC, f/k/a InsCap Management, LLC, Mr. Stuifzand executed a promissory note on May 29, 2009, wherein he promised to pay $314,000 to InsCap. 7 Affirmation of Shalini K. Rajoo in Support of Plaintiff s Proposed Order for Commission, Concord Capital Management, LLC v. Fifth Third Bank, Case No , Supreme Court of New York, County of New York (filed Aug. 24, 2011), available at tem=prod. 8 Order Directing Issuance of Commission, Concord Capital Management, LLC v. Fifth Third Bank, Case No , Supreme Court of New York, County of New York (entered Aug. 14, 2011), available at =prod. 9 Decision and Order, Concord Capital Management, LLC v. Fifth Third Bank, Case No , Supreme Court of New York, County of New York (entered Dec. 1, 2011), available at tem=prod. 10 Order, Concord Capital Management, LLC v. Fifth Third Bank, Case No , Supreme Court of New York, County of New York (entered Aug. 8, 2012), available at &system=prod. 11 Docket, Concord Capital Management, et al. v. Fifth Bank, et al., Case No , Supreme Court of New York, County of New York, Page 3 of 6

4 The complaint alleged that Mr. Stuifzand failed to make the minimum payments when due and further failed to provide Concord with copies of relevant income statements or tax returns to demonstrate his cumulative earnings for the specified years. 12 On April 12, 2012, the court denied Concord s motion for default judgment and dismissed the complaint without prejudice because the process server failed to properly serve Mr. Stuifzand. 13 Nina Investments, LLC v. Rene Stuifzand, Case No , New York County, New York. According to a complaint filed on August 30, 2011 by Nina Investments, LLC, Mr. Stuifzand had executed a limited personal guaranty of up to $156,658 of the indebtedness of InsCap arising under a loan agreement in which Nina Investments agreed to loan up to $26.5 million to InsCap. The complaint alleged that InsCap failed to comply with the terms of the loan agreement and that Mr. Stuifzand defaulted on the limited personal guaranty. 14 A default judgment was entered against Mr. Stuifzand in the amount of $162, on January 4, c Bankruptcy Filing Mr. Stuifzand subsequently filed for Chapter 7 individual bankruptcy on May 15, 2012, in the United States Bankruptcy Court of the District of Connecticut, Case No The bankruptcy petition listed business debts on Schedule F (Creditors Holding Unsecured Nonpriority Claims), including to Bal Das; Bank of America; Carl Meyer; Columbus Nova Investments IV; Concord Capital Funding, Inc.; Concord Capital Funding, LCC; Concord Capital Insurance Service Inc.; Concord Capital Management, LCC; Concord Partners; Edward Netherland; Fifth Third Bank; Gary Brecka; Haris Raghavan; Ira Brody; M&T Bank Corporation; Nina Investments, LLC; Rita Hill; Robert Thompson; Santa Maria Overseas, Ltd.; and Willmington Trust Company. On Schedule I (Current Income of Individual Debtor(s)), the 12 Complaint, Concord Capital Mgmt. f/k/a InsCap Mgmt., LLC v. Rene Stuifzand, Case No , Supreme Court of New York, County of New York (filed July 26, 2011), available at =prod. 13 Decision and Order, Concord Capital Management f/k/a InsCap Management, LLC v. Rene Stuifzand, Case No (entered Apr. 12, 2012), available at m=prod. 14 Complaint, Nina Investments, LLC v. Rene Stuifzand, Case No , Supreme Court of New York, County of New York (filed Aug. 30, 2011), available at jeutq==&system=prod. 15 Judgment, Nina Investments, LLC v. Rene Stuifzand, Case No , Supreme Court of New York, County of New York (entered Jan. 4, 2012), available at &system=prod. 16 Copies of the bankruptcy documents are publically available from the District of Connecticut Bankruptcy Court with a PACER login and password at PACER is an electronic public access system that allows users to obtain case and docket information. Information on how to access documents through PACER is available at Page 4 of 6

5 bankruptcy petition listed Mr. Stuifzand s occupation as Director of Lending at Windward Capital Partners, LLC, with a monthly income from operation of business of $12,500. The petition listed four lawsuits to which Mr. Stuifzand was a party within one year immediately preceding the filing of the bankruptcy case: (1) Nina Investments, LLC v. Rene Stuifzand, Case No , Supreme Court of New York, New York County ; (2) Concord Capital Management v. Rene Stuifzand, Case No /2011, Supreme Court of New York, New York County; (3) Fifth Third Bank v. Concord Capital Management, et al., Case No L , Illinois Circuit Court, Cook County; and (4) Henry Smith v. Edward H. Netherland, et al., Case No , District Court of Dallas County, Texas. Mr. Stuifzand s bankruptcy discharge was entered on September 6, MARK G. POLLOCK Mark G. Pollock is the principal owner of Pollock Financial Group, LLC, an Ohio domestic Limited Liability Company formed on August 10, Pollock Financial Group, LLC is not registered with the Florida Division of Corporations to do business in Florida. 18 Mr. Pollock currently holds two licenses with the Florida Department of Financial Services, which were issued on January 8, 1997: a nonresident life and health/variable annuity license (0815) and a nonresident life license (0816). 19 He has appointments with six (6) licensed entities: Lincoln National Life Insurance Company; Connecticut General Life Insurance Company; Berkshire Life Insurance Company of America; Guardian Life Insurance Company of America; Principal Life Insurance Company; Great-West Life & Annuity Insurance Company. None of these insurers are featured in the proposal being presented. Mr. Pollock filed for Chapter 7 individual bankruptcy, along with his wife, on November 13, 2012, in the United States Bankruptcy Court in the Northern District of Ohio, Case No aih. 20 Schedule I, Current Income of Individual Debtor(s), indicated that Mr. Pollock was employed by Pollock Financial Group, LLC and had an average monthly income of $0. Mr. Pollock s bankruptcy discharge was entered on October 16, WILLIAM BILL OLIVE 17 Search results from Ohio Secretary of State s website, 18 Search results from Florida Department of State, Division of Corporations website, 19 To search for licensed insurance agents in Florida, go to 20 Copies of the bankruptcy documents are publically available from the District of Connecticut Bankruptcy Court with a PACER login and password at PACER is an electronic public access system that allows users to obtain case and docket information. Information on how to access documents through PACER is available at Page 5 of 6

6 William Bill Olive is employed by Pollock Financial Group. Mr. Olive currently holds three licenses with the Florida Department of Financial Services: Life including Variable Annuity (0214), issued April 10, 1997; Life and Health (0218), issued April 30, 1979; and Health (0240), issued April 30, Mr. Olive currently has no active appointments with any insurers licensed in the State of Florida. Page 6 of 6

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27 Title 17 Laws of Bermuda Item 50 BERMUDA 1978 : 25 LIFE INSURANCE ACT 1978 ARRANGEMENT OF SECTIONS 1 Interpretation 2 Application 3 Insurer to issue policy 4 Contents of policy 5 Contents of group policy 6 Contents of group certificate 7 Insurable interest 8 Insurable interest; definition 9 Contract taking effect 10 Default in paying premium 11 Payment of premiums 12 Duty to disclose 13 Incontestability 14 Pre-existing conditions 15 Non-disclosure by insurer 16 Age of insured 17 Mis-statement of age in group insurance 18 Effect of suicide 19 Reinstatement 20 Designation of beneficiary 21 Designation of beneficiary irrevocably 22 Designation in invalid will 23 Trustee for beneficiary 24 Beneficiary predeceasing life insured 25 Right to sue 26 Insurance money free from creditors 27 Insured dealing with contract 28 Insured entitled to dividends 29 Transfer of ownership 30 Assignment of contract 31 Contract may be unassignable 32 Rights of group life insured normally assignable 33 Group life insured enforcing rights 34 Proof of claim and place of payment 1989 Revision 1

28 LIFE INSURANCE ACT Premiums paid with intent to defraud 36 Limitation of action 37 Documents affecting title 38 Declaration as to sufficiency of proof 39 Declaration as to presumption of death 40 Power of court 41 Court may make order [preamble and words of enactment omitted] 42 Stay of proceedings 43 Payment into court 44 Insurance money payable in instalments 45 Insurer holding insurance money 46 Power of court to award compensation 47 Saving 48 Repeal [omitted] [13 June 1978] Interpretation 1 In this Act, except where the context otherwise requires "accident insurance" means insurance by which the insurer undertakes, otherwise than incidentally to some other class of insurance, to pay insurance money in the event of accident to the person insured but does not include insurance by which the insurer undertakes to pay insurance money both in the event of death by accident and in the event of death from any other cause; "accidental death insurance" means insurance undertaken by an insurer as part of a contract of life insurance whereby the insurer undertakes to pay an additional amount of insurance money in the event of death by accident of the person whose life is insured; "application" means an application for insurance or for the reinstatement of insurance; "beneficiary" means a person, other than the insured or his estate representative, to whom or for whose benefit insurance money is made payable in a contract or by a declaration; "contract" means a contract of life insurance, "Court" means the Supreme Court; "creditor's group insurance" means insurance effected by a creditor in respect of the lives of his debtors whereby the lives of the debtors are insured severally under a single contract; "declaration" means an instrument signed by the insured (i) with respect to which an endorsement is made on the policy; or Revision

29 Title 17 Laws of Bermuda Item 50 (ii) that identifies the contract; or (iii) that describes the insurance, insurance fund, insurance money or a part thereof, in which he designates, or alters or revokes the designation of, his personal representative or a beneficiary as one to whom or for whose benefit insurance money is to be payable; "disability insurance" means insurance undertaken by an insurer as part of a contract of life insurance whereby the insurer undertakes to pay insurance money or to provide other benefits in the event that the person whose life is insured becomes disabled as a result of bodily injury or disease; "family insurance" means insurance whereby the lives of the insured and one or more persons related to him by blood, marriage or adoption and insured under a simple contract between an insurer and an insured; "fraternal society" means a society, order or association incorporated for the purpose of making with its members only, and not for profit, contracts of life, accident or sickness insurance in accordance with its constitution, bye-laws and rules and any applicable statutory provision; "group insurance" means insurance, other than creditor's group insurance and family insurance, whereby the lives of a number of persons are insured severally under a single contract between an insurer and an employer or other person; "group life insured" means a person whose life is insured by a contract of group insurance but does not include a person whose life is insured under the contract as a person dependent upon, or related to, him; "insurance money" means the amount payable by an insurer under a contract, and includes all benefits, surplus, profits, dividends, bonuses, and annuities payable under the contract; "insured" (i) (ii) except as provided in paragraph (ii) means the person who makes a contract with an insurer; and in the case of group insurance when the right of the group lives insured to designate persons to receive insurance money is not removed or restricted means in relation to the designation of beneficiaries 1989 Revision 3

30 LIFE INSURANCE ACT 1978 or other person to receive insurance money or in relation to the status of beneficiaries, the group life insured; "insurer" means the person who undertakes or agrees or offers to undertake a contract; "life insurance" means insurance whereby an insurer undertakes to pay insurance money, (i) (ii) on death; or on the happening of an event or contingency dependent on human life; or (iii) at a fixed or determinable future time; or (iv) for a term dependent on human life, and, without restricting the generality of the foregoing, includes accidental death insurance but not accident insurance; "will" includes codicil. Application 2 (1) This Act applies (a) only to contracts made after its commencement; and (b) to all contracts made in Bermuda unless the parties agree that some other law shall apply. (2) Where the person who would have been entitled to the payment of insurance money, if the money had become payable immediately prior to 13 June 1978 was the object of a trust within the meaning of section 15 of the Married Women's Property Act 1901, as it existed immediately prior to that day, that person shall be deemed to have been designated a beneficiary irrevocably, and the insured may not, except in accordance with this Act (a) alter or revoke the designation of that beneficiary; or (b) assign, exercise rights under or in respect of, surrender or otherwise deal with the contract, but this subsection does not apply after the time at which the insurance money becomes payable wholly to a person other than a person deemed to be designated a beneficiary irrevocably. Insurer to issue policy 3 (1) An insurer entering into a contract shall issue a policy. (2) Subject to subsection (3), the provisions in (a) the application; Revision

31 Title 17 Laws of Bermuda Item 50 (b) the policy; (c) any document attached to the policy when issued; (d) any amendment to the contract agreed upon in writing after the policy is issued; and (e) in the case of group insurance and creditor's group insurance any information in writing material to the insurance that is furnished to the insurer pursuant to the policy or the application, shall constitute the entire contract. (3) In the case of a contract made by a fraternal society, the policy, the Act or instrument of incorporation of the society, its constitution, bye-laws and rules, and the amendments made from time to time to any of them, the application for the contract and the medical statement of the applicant shall constitute the entire contract. (4) An insurer shall, upon request, furnish to the insured or to a claimant under the contract a copy of the application. Contents of policy 4 (1) This section does not apply to a contract policy: (a) of group insurance; or (b) of creditor's group insurance; or (c) made by a fraternal society. (2) An insurer shall set forth the following particulars the 1 The name or a sufficient description of the insured and of the person whose life is insured. 2 The amount, or the method of determining the amount, of the insurance money payable, and the conditions under which it becomes payable. 3 The amount, or the method of determining the amount of the premium and the period of grace, if any, within which it may be paid. 4 Whether the contract provides for participation in a distribution of surplus or profits that may be declared by the insurer. 5 The conditions upon which the contract may be reinstated if it lapses. 6 The options, if any 1989 Revision 5

32 LIFE INSURANCE ACT 1978 (a) (b) (c) of surrendering the contract for cash; of obtaining a loan or an advance payment of the insurance money; and of obtaining paid-up or extended insurance. Contents of group policy 5 In the case of a contract of group insurance or of creditor's group insurance, an insurer shall set forth the following particulars in the policy: 1 The name or a sufficient description of the insured. 2 The method of determining the persons whose lives are insured. 3 The amount, or the method of determining the amount, of the insurance money payable, and the conditions under which it becomes payable. 4 Any removal or restriction of the right of the group lives insured to designate a beneficiary and where such restrictions exist, a description of the persons eligible to receive the money. 5 The period of grace, if any, within which the premium may be paid. 6 Whether the contract provides for participation in a distribution of surplus or profits that may be declared by the insurer. Contents of group certificate 6 In the case of a contract of group insurance, an insurer shall issue, for delivery by the insured to each group life insured, a certificate or other document in which are set forth the following particulars: 1 The name of the insurer and an identification of the contract. 2 The amount, or the method of determining the amount, of insurance on the group life insured and on any person whose life is insured under the contract dependent upon, or related to, him. 3 The circumstances in which the insurance terminates and the rights, if any, upon such termination, of the group life insured or of any person whose life is insured under the contract as a person dependent upon, or related to, him Revision

33 Title 17 Laws of Bermuda Item 50 Insurable interest 7 (1) Subject to subsection (2), where at the time a contract would otherwise take effect the insured has no insurable interest in the person whose life is insured the contract is void. (2) A contract is not void for lack of insurable interest (a) if it is a contract of group insurance; or (b) if the person whose life is insured has consented in writing to the insurance being placed on his life. (3) Where the person whose life is insured is under the age of sixteen years, consent to insurance being placed on his life may be given by one of his parents or by a person standing in loco parentis to him. Insurable interest; definition 8 Without restricting the meaning of "insurable interest", a person has an insurable interest in his own life and in the life of (a) a child or grandchild; (b) his spouse or a parent; (c) any person upon whom he is wholly or in part dependent, for, or from whom he is receiving support or education; (d) his employee; and (e) any person in the duration of whose life he has a pecuniary interest. [Section 8 para (a) amended by 2002:36 Sch para 11 effective 19 January 2004] Contract taking effect 9 (1) Subject to any provision to the contrary in the application or the policy, a contract does not take effect unless (a) the policy is delivered to an insured, his assign or agent, or to a beneficiary; or (b) payment of the first premium is made to the insurer or its authorized agent; and (c) no change has taken place in the insurability of the life to be insured between the time the application was completed and the time the policy was delivered. (2) Where a policy is issued on the terms applied for and is delivered to an agent of the insurer for unconditional delivery to a person 1989 Revision 7

34 LIFE INSURANCE ACT 1978 referred to in subsection (1)(a), it shall be deemed, but not to the prejudice of the insured, to have been delivered to the insured. Default in paying premium 10 (1) Where a cheque or other bill of exchange, or a promissory note or other written promise to pay, is given for the whole or part of a premium and payment is not made according to its tenor, the premium or part thereof shall be deemed not to have been paid. (2) Where a remittance for or on account of a premium is sent in a registered letter to an insurer and is received by him, the remittance shall be deemed to have been received at the time of the registration of the letter. Payment of premiums 11 (1) Except in the case of group insurance, an assignee of a contract, a beneficiary or a person acting on behalf of one of them or of the insured may pay any premium that the insured is entitled to pay. (2) Where a premium, other than the initial premium, is not paid at the time it is due, the premium may be paid within a period of grace of (a) twenty-eight days from and excluding the day on which the premium is due; or (b) the number of days, if any, specified in the contract for payment of an overdue premium, whichever is the longer period. (3) Where the happening of the event upon which the insurance money becomes payable occurs on the due date or during the period of grace and before the overdue premium is paid, the contract shall be deemed to be in effect as if the premium had been paid at the time it was due, but except in the case of group insurance or creditor's group insurance the amount of the premium, together with interest, if any, at the rate specified in the contract, but not exceeding the statutory rate as fixed by the Interest and Credit Charges (Regulation) Act 1975 [title 17 item 22], and any instalments of premium payable for the balance of the current policy year may be deducted from the insurance money. Duty to disclose 12 (1) An applicant for insurance, a person whose life is to be insured and a person who consents to the insurance shall each disclose to the insurer in the application, on a medical examination, if any, and in any written statements or answers furnished as evidence of insurability, every fact which within his knowledge and belief is material to the insurance and is not so disclosed by any of the others Revision

35 Title 17 Laws of Bermuda Item 50 (2) Subject to section 13, a failure to disclose, or a misrepresentation of, such a fact renders the contract voidable by the insurer. Incontestability 13 (1) This section does not apply to a mis-statement of age. (2) Subject to subsections (3) and (4), where a contract has been in effect for two years during the lifetime of the person whose life is insured, a failure to disclose or a mis-representation of a fact required to be disclosed by section 12 does not, in the absence of fraud, render the contract voidable. (3) In the case of a contract of group insurance or creditor's group insurance, a failure to disclose or a mis-representation of such a fact in respect of a person whose life is insured under the contract does not render the contract voidable, but, if evidence of insurability is specifically requested by the insurer, the insurance in respect of that person is voidable by the insurer unless it has been in effect for two years during the lifetime of that person, in which event it is not, in absence of fraud, voidable. (4) In the case of disability insurance, when a claim arises from a disability beginning before a contract, including renewals thereof, has been in force for two years with respect to the person in respect of whom the claim is made, subsection (2) does not apply to that claim. Pre-existing conditions 14 Where a contract contains a general exception or reduction relating to disability insurance with respect to pre-existing disease or physical conditions and the person in respect of whom the disability insurance exists suffers or has suffered from a disease or physical condition that existed before the date the disability insurance came into force with respect to that person and the disease or physical condition is not by name or specific description excluded from the insurance respecting that person (a) the prior existence of the disease or physical condition is not except in the case of fraud, available as a defence against liability in whole or in part for a loss incurred or a disability beginning after the disability insurance including renewals thereof, has been in force continuously with respect to that person for two years prior to the date of the loss incurred or the commencement of the disability; and (b) the existence of the disease or physical condition is not, except in the case of fraud, available as a defence against liability in whole or in part if the disease or 1989 Revision 9

36 LIFE INSURANCE ACT 1978 physical condition was disclosed in the application for the disability insurance. Non-disclosure by insurer 15 Where an insurer fails to disclose or misrepresents a fact material to the contract, the contract is voidable by the insured, but, in the absence of fraud, the contract is not by reason of such failure or misrepresentation voidable after the contract has been in effect for two years. Age of insured 16 (1) This section does not apply to a contract of group insurance or of creditor's group insurance. (2) Subject to subsection (3), where the age of a person whose life is insured is mis-stated to the insurer, the insurance money provided by the contract shall be increased or decreased to the amount that would have been provided for the same premium at the correct age. (3) Where a contract limits the insurable age and the correct age of the person whose life is insured at the date of the application exceeds the age so limited, the contract is, during the lifetime of that person but not later than five years from the date the contract takes effect, voidable by the insurer within sixty days after the insurer discovers the error. Mis-statement of age in group insurance 17 In the case of a contract of group insurance or of creditor's group insurance, a mis-statement to the insurer of the age of a person whose life is insured does not of itself render the contract voidable, and the provisions, if any, of the contract with respect to age or mis-statement of age apply. Effect of suicide 18 (1) Where a contract contains an undertaking, express or implied, that insurance money will be paid if a person whose life is insured commits suicide, the undertaking is lawful and enforceable. (2) Where a contract provides that in case a person whose life is insured commits suicide within a certain period of time the contract is void or the amount payable under it is reduced, if the contract lapses and is subsequently reinstated on one or more occasions, the period of time commences to run from the date of the latest reinstatement. Reinstatement 19 (1) This section does not apply to a contract of group insurance or of creditor's group insurance or to a contract made by a fraternal society Revision

37 Title 17 Laws of Bermuda Item 50 (2) Where a contract lapses and the insured within two years applies for reinstatement of the contract, if within that time he (a) pays the overdue premiums and other indebtedness under the contract to the insurer, together with interest at the rate specified in the contract, but not exceeding the statutory rate as fixed by the Interest and Credit Charges (Regulation) Act 1975 [title 17 item 22], compounded annually; and (b) produces (i) (ii) evidence which satisfies the insurer as to the good health; and other evidence which satisfies the insurer as to other aspects of the insurability, of the person whose life was insured, the insurer shall reinstate the contract. (3) Subsection (2) does not apply where the cash surrender value has been paid or an option of taking paid-up or extended insurance has been exercised. (4) Sections 12, 13, 14 and 15 shall apply mutatis mutandis to a failure at the time of reinstatement of a contract to disclose, or a misrepresentation at that time, and the period of two years to which reference is made in sections 13, 14 and 15 shall commence to run in respect of a reinstatement from the date of the reinstatement: Provided that the contract shall be voidable on account of fraud at any time before or after reinstatement. Designation of beneficiary 20 (1) Subject to subsection (4) an insured may in a contract or by a declaration filed with the insurer designate himself, his estate representative or a beneficiary to receive insurance money. (2) Subject to section 21, the insured may from time to time alter or revoke the designation by a declaration filed with the insurer. (3) A designation in favour of "heirs", "next of kin" or "estate", or the use of words of like import in a designation, shall be deemed to be a designation of the estate representative of the insured. (4) A provision in a group insurance policy which removes or restricts the right of a group life insured to make a designation is valid. (5) When a beneficiary is designated by the insured as "wife" or "husband" then the designation shall mean the wife or husband, as the 1989 Revision 11

38 LIFE INSURANCE ACT 1978 case may be, at the time of the happening of the event upon which the insurance money becomes payable. (6) When a beneficiary is designated by the insured as a "wife" or "husband" and is further identified by name then the designation shall mean that particular person whether or not that person is still the wife or husband at the time of the happening of the event upon which the insurance money becomes payable. (7) When a beneficiary is designated by the insured as a child and is further identified by name then the designation shall mean that particular child. Designation of beneficiary irrevocably 21 (1) An insured may in a contract, or by a declaration other than a declaration that is part of a will, filed with the insurer during the lifetime of the person whose life is insured designate by name a beneficiary irrevocably and in that event during the lifetime of the beneficiary, while the designation is in effect, may not alter or revoke the designation without the consent of the beneficiary and the interest of the beneficiary in the insurance money is not subject to the control of the insured or of his creditors and does not form part of the estate of the insured. (2) Where the insured purports to designate a beneficiary irrevocably in a will or in a declaration that is not filed as provided in subsection (1), the designation has the same effect as if the insured had not purported to make it irrevocable. Designation in invalid will 22 (1) A designation in an instrument purporting to be a will is not ineffective by reason only of the fact that the instrument is invalid as a will or that the designation is invalid as a bequest under the will. (2) A designation in a will is of no effect against a designation made later than the making of the will. (3) Where a designation is contained in a will, if subsequently the will is revoked by operation of law or otherwise, the designation is thereby revoked. (4) Where a designation is contained in an instrument that purports to be a will, if subsequently the instrument if valid as a will would be revoked by operation of law or otherwise, the designation is thereby revoked. Trustee for beneficiary 23 (1) An insured may notwithstanding section 21 (1) in a contract or by a declaration appoint a trustee for a beneficiary and may alter or revoke the appointment by a declaration Revision

39 Title 17 Laws of Bermuda Item 50 (2) A payment made by an insurer to a trustee for a beneficiary discharges the insurer to the extent of the payment. Beneficiary predeceasing life insured 24 (1) Where a beneficiary predeceases the person whose life is insured, and no disposition of the share of the deceased beneficiary in the insurance money is provided in the contract or by a declaration, the share is payable (a) to the surviving beneficiary; or (b) if there is more than one surviving beneficiary, to the surviving beneficiaries in equal shares; or (c) if there is no surviving beneficiary, to the insured or his estate representative. (2) Where two or more beneficiaries are designated otherwise than alternatively, but no division of the insurance money is made, the insurance money is payable to them in equal shares. Right to sue 25 A beneficiary may enforce in his own name, and a trustee appointed pursuant to section 23 may enforce as trustee, the payment of insurance money made payable to him in the contract or by a declaration and in accordance with the provisions thereof, but the insurer may set up any defence that it could have set up against the insured or his estate representative. Insurance money free from creditors 26 (1) Where a beneficiary is designated, the insurance money, from the time of the happening of the event upon which the insurance money becomes payable, is not part of the estate of the insured and is not subject to the claims of the creditors of the insured. (2) While a designation in favour of a child or grandchild as defined in section 8 or a spouse or parent of a person whose life is insured, or any of them, is in effect, the rights and interests of the insured in the insurance money and in the contract are exempt from execution or seizure. Insured dealing with contract 27 Notwithstanding the designation of a beneficiary the insured may assign, exercise rights under or in respect of, surrender or otherwise deal with the contract as provided therein or as provided in this Act or as may be agreed with the insurer; but not so as to affect the rights of a beneficiary designated irrevocably unless the beneficiary has reached the age of majority and has consented Revision 13

40 LIFE INSURANCE ACT 1978 Insured entitled to dividends 28 (1) Notwithstanding the designation of a beneficiary irrevocably, the insured is entitled during the lifetime of the person whose life is insured to the dividends or bonuses declared on a contract and to the premiums paid in advance thereon unless the contract otherwise provides. (2) Unless the insured otherwise directs, the insurer may apply the dividends or bonuses declared on the contract for the purpose of keeping the contract in force. (3) Subject to the contract and to any direction by the insured to the contrary, dividends, bonuses and premiums paid in advance but unused held to the credit of the insured shall, upon the happening of the event upon which the insurance money becomes payable, be added to and form part of the insurance money then payable. Transfer of ownership 29 (1) Where in a contract or in an agreement in writing between an insurer and an insured it is provided that a person named in the contract or in the agreement has, upon the death of the insured, the rights and interests of the insured in the contract (a) the rights and interests of the insured in the contract do not, upon the death of the insured, form part of his estate; and (b) upon the death of the insured, the person named in the contract or in the agreement has the rights and interests given to the insured by the contract and by this Act and shall be deemed to be the insured. (2) Where the contract or agreement provides that two or more persons named in the contract or in the agreement shall, upon the death of the insured, have successively, on the death of each of them, the rights and interests of the insured in the contract, this section applies successively, mutatis mutandis, to each of such persons and to his rights and interests in the contract. (3) Notwithstanding any nomination made pursuant to this section, the insured may, prior to his death, assign, exercise rights under or in respect of, surrender or otherwise deal with the contracts as if the nomination had not been made, and may alter or revoke the nomination by agreement in writing with the insurer. Assignment of contract 30 (1) Where an assignee of a contract gives notice in writing of the assignment to the insurer, he has priority of interest as against (a) any assignee other than one who gave notice earlier in like manner; and Revision

41 Title 17 Laws of Bermuda Item 50 (b) a beneficiary other than one designated irrevocably as provided in section 21 prior to the time the assignee gave notice to the insurer of the assignment in the manner prescribed in this subsection. (2) Where a contract is assigned as security, rights under the contract are affected only to the extent necessary to give effect to the rights and interests of the assignee. (3) Where a contract is assigned unconditionally and otherwise than as security, the assignee has all the rights and interests given to the insured by the contract and by this Act and shall be deemed to be the insured and any subsisting designation of a beneficiary not made irrevocably is revoked. Contract may be unassignable 31 A provision in a contract to the effect that the rights or interests of the insured, or, in the case of group insurance, the group life insured, are not assignable is valid. Rights of group life insured normally assignable 32 Subject to section 31 the rights and interests of a group life insured given to him under a contract or under this Act are assignable and if they are assigned unconditionally and otherwise than as security the assignee shall be deemed to be the group life insured and any subsisting designation of a beneficiary not made irrevocably is revoked. Group life insured enforcing rights 33 A group life insured may enforce in his own name and for his own benefit a right given to him under a contract, subject to any defence available to the insurer against him or against the insured. Proof of claim and place of payment 34 (1) When an insurer receives sufficient evidence of the happening of the event upon which the insurance money becomes payable and of (a) the cause and circumstances upon which insurance money becomes payable; (b) the age of the person whose life is insured; (c) the right of the claimant to receive payment; and (d) the name and age of the beneficiary, if there is a beneficiary, he shall, within thirty days after receiving the evidence and proof, pay the insurance money to the person entitled thereto Revision 15

42 LIFE INSURANCE ACT 1978 (2) Insurance money is payable in Bermuda unless the contract otherwise provides. Premiums paid with intent to defraud 35 Notwithstanding any other provision of this Act if it can be shown that a contract was effected and the premiums paid with intent to defraud creditors of the insured, they shall be entitled to receive, out of the money payable under the contract a sum equal to the premiums paid. Limitation of action 36 (1) Subject to subsection (2), an action or proceeding against an insurer for the recovery of insurance money shall not be commenced more than one year after the payment of the insurance money has been refused by the insurer or more than six years after the happening of the event upon which the insurance money becomes payable, whichever period first expires. (2) Where a declaration has been made under section 39, an action or proceeding to which reference is made in subsection (1) shall not be commenced more than one year after the date of the declaration. Documents affecting title 37 (1) Until an insurer receives an instrument including a will or an order of a court affecting the right to receive insurance money, or a copy receivable in evidence in court of any such instrument or order, it may make payment of the insurance money and shall be as fully discharged to the extent of the amount paid as if there were no such instrument or order. (2) Subsection (1) does not affect the rights or interests of any person other than the insurer. Declaration as to sufficiency of proof 38 Where an insurer admits the validity of the insurance but there is a question respecting the evidence or proof required by section 34 and no other question is in issue except a question under section 39, the insurer or the claimant may, before or after action is brought and upon at least thirty days notice, apply to the Court for a declaration as to the adequacy of the evidence or proof furnished, and the Court may make the declaration or may direct what further evidence or proof shall be furnished and on the furnishing thereof may make the declaration or, in special circumstances, may dispense with further evidence or proof. Declaration as to presumption of death 39 Where a claimant alleges that the person whose life is insured should be presumed to be dead by reason of his not having been heard of for seven years and there is no other question in issue except a question Revision

43 Title 17 Laws of Bermuda Item 50 under section 38, the insurer or the claimant may, before or after action is brought and upon at least thirty days notice, apply to the Court for a declaration as to presumption of the death and the court may make the declaration. Power of court 40 Where the court finds that the evidence furnished under section 34 is not sufficient or that a presumption of death is not established, it may order that the matters in issue be decided in an action brought or to be brought, or may make such other order as it deems just respecting further evidence to be furnished by the claimant, publication of advertisements, further inquiry or any other matter or respecting costs. Court may make order 41 (1) Upon making a declaration under section 38 or 39, the Court may make such order respecting the payment of the insurance money as it deems just and an order made under this subsection is binding upon the applicant and upon all persons to whom notice of the application has been given. (2) A payment made under an order made under subsection (1) discharges the insurer to the extent of the amount paid. Stay of proceedings 42 Unless the Court otherwise orders, an application made under section 38 or 39 operates as a stay of any pending action with respect to the insurance money. Payment into court 43 (1) Where an insurer does not within thirty days after receipt of the evidence and proof required by section 35 pay the insurance money to some person competent to receive it or into court, the Court may, upon application of any person, order that the insurance money or any part thereof be paid into court, or may make such other order as to the distribution of the money as it deems just. (2) When an insurer admits liability for insurance money and he is unable to obtain an adequate and sufficient discharge because (a) there are adverse claimants; or (b) the whereabouts of a person entitled is unknown; or (c) there is no person capable of giving and authorized to give a valid discharge therefor, who is willing to do so, the insurer may pay the insurance money into court at any time after thirty days from the date of the happening of the event upon which the insurance money becomes payable Revision 17

44 LIFE INSURANCE ACT 1978 (3) A receipt from the Court shall be sufficient discharge to the insurer for the money paid into court under subsection (1) and (2). (4) When money is paid into court under this Act it shall, subject to rules of court, be dealt with according to the orders of the Court. (5) Subject to rules of court the Court may on the application of any interested person make such order as to distribution of money paid into court under this Act as it thinks just. (6) Rules of court made under this Act shall not be subject to Parliamentary scrutiny under section 6 of the Statutory Instruments Act 1977 Insurance money payable in instalments 44 (1) Subject to subsections (2) and (3), where insurance money is payable in instalments and a contract, or an instrument signed by the insured and delivered to the insurer, provides that a beneficiary has not the right to commute the instalments or to alienate or assign his interest therein, the insurer shall not, unless the insured subsequently directs otherwise in writing, commute the instalments or pay them to any person other than the beneficiary, and the instalments are not, in the hands of the insurer, subject to any legal process except an action to recover the value of necessaries supplied to the beneficiary or his minor children. (2) Subject to subsection (3) the Court may from time to time upon the application of the beneficiary and upon at least ten days notice, declare that in view of special circumstances, the beneficiary shall have the right to (a) commute instalments of insurance money and when a basis for commutation is not provided in the contract and the applicant and the insurer are unable to agree upon a basis, it shall be fixed by the Court having regard to all the material circumstances; (b) alienate or assign his interest in the insurance money. (3) Subsection (2)(a) shall not apply to payments under an annuity contract or under a group insurance contract in which the right of the group lives insured to designate persons to receive the insurance money is removed or restricted and the insurance money is payable to the persons described therein. apply. (4) After the death of the beneficiary subsection (1) shall not (5) In this section, "instalments" includes insurance money held by the insurer under section Revision

45 Title 17 Laws of Bermuda Item 50 Insurer holding insurance money 45 (1) An insurer may hold insurance money (a) subject to the order of an insured or the person to whom it is payable; or (b) upon trusts or other agreements for the benefit of the insured or the person to whom it is payable, as provided in the contract, by an agreement in writing to which it is a party, or by a declaration, with interest at a rate agreed upon therein or, where no rate is agreed upon, at the rate declared from time to time by the insurer in respect of insurance money so held by the insurer. (2) The insurer is not bound to hold insurance money as provided in subsection (1) under the terms of a declaration to which the insurer has not agreed in writing. Power of court to award compensation 46 When in any proceedings the Court grants specific performance of any contract or any other relief to an insurer, an insured, a beneficiary or any person acting on their behalf it may in addition award that party compensation for any loss he has sustained by reason of any breach of the provisions of this Act against whom the order of specific performance or other relief has been granted or awarded. Saving 47 (1) Nothing in this Act shall apply to any superannuation or pension scheme established by an employer for the benefit of his employees: Provided that where any person would have been entitled to the payment of any money under such a scheme, if the money had become payable immediately prior to 13 June 1978, then section 2(2) shall apply as if the money payable was insurance money; and Provided further the provisions of sections 20 and 21 shall apply to an employee as if the employee was an insured in respect of any money payable on his death. (2) For the purpose of subsection (1) the Government shall be bound in the same way as any other employer. (3) Nothing in this Act shall apply to compensation payable under the Workmen's Compensation Act 1965 [title 18 item 3]. Repeal 48 [omitted] 1989 Revision 19

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59 LIFE LIMITED GROUP VARIABLE UNIVERSAL LIFE INSURANCE POLICY Flexible Premiums Payable Non-Participating No Dividends Period of Coverage Not Guaranteed THIS IS A LEGAL CONTRACT READ IT CAREFULLY Life Limited (the Company ) will pay the Net Death Benefit to the named Beneficiary upon receipt of due proof of an Insured s death. This Policy provides a death benefit upon the death of Insureds who are or were members of the specified group named in the Policy Data pages and who are insured under this Policy. Insureds have no rights or benefits under this Policy. Payment will be made only if this Policy and the Insured s Account is in force on the date of the Insured s death and the date of death is before the Maturity Date of the Insured s Account. All benefits and payments are subject to the provisions of this Policy. All benefits are payable in Bermuda. Signed for the Company at its office in Hamilton, Bermuda. Director CASH VALUE BENEFITS PROVIDED BY THIS POLICY ARE BASED ON THE INVESTMENT PERFORMANCE OF THE SEGREGATED ACCOUNTS AND MAY INCREASE OR DECREASE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT. THE DURATION OF THE POLICY, THE INSURED S ACCOUNT OR AMOUNT OF ANY DEATH BENEFIT MAY VARY BASED ON THE INVESTMENT PERFORMANCE OF THE SEGREGATED ACCOUNTS. The Policy s unloaned Cash Value is held exclusively in the Segregated Accounts of the Company. There is no General Account (fixed) option available under this Policy. 1

60 POLICY DATA POLICY NUMBER: GROUP: Pension Plan POLICY OWNER: [ ] IMPORTANT DATES: Issue Date: Processing Date: Last Business Day of the month DEATH BENEFIT: Initial Death Benefit Option: Tax Qualification Test: Death Benefit Change Anniversary: Option B for all Insured s Accounts, unless otherwise noted on the Schedule of Insureds. Guidelines Premium Test for all Insured s Accounts, unless otherwise noted on the Schedule of Insureds. For all Insured s Accounts, the 5 th Insured s Account Anniversary unless otherwise noted on the Schedule of Insureds. BENEFICIARY: The Net Death Benefit payable upon the death of an Insured under the Policy shall be paid as follows: That portion of the Net Death Benefit that represents the Net Cash Value is to be paid to the Cash Value Beneficiary named below and such Cash Value Beneficiary shall be the owner of the Policy for purposes of Treasury Regulations Sections and That portion of the Net Death Benefit that represents the Net Amount at Risk ( NAAR ) is to be paid to the NAAR Beneficiary named below and such NAAR Beneficiary shall be the non-owner of the Policy for purposes of Treasury Regulations Section and Cash Value Beneficiary: NAAR Beneficiary: [ ] [ ] 2

61 POLICY DATA FEES AND CHARGES: Premium Charge: Mortality & Expense Risk Charge: Issue Charge: 0.70% deducted from each Premium payment 0.65%, on an annual basis, of the Net Cash Value, calculated and deducted monthly as of the Processing Date $300 deducted from the Initial Premium payment for an Insured s Account Annual Account Maintenance Charge: $100 per year per Insured s Account Maximum Surrender Charge: Partial Surrender Charge: Transfer Fee: None None $0 per transaction Loan Transaction Fee: $0 Investment Management Fees and Operating Expenses: Cost of Insurance Charge: All investment management fees, including any bonuses, incentive fees and/or performance fees that are charged by any advisor or sub-advisor to a Segregated Account will be deducted from the assets of such Segregated Account. The operating expenses of each Segregated Account are deducted from the assets of the affected Segregated Account. Investment Management Fees are shown on the Investment Selection Form to be completed by the Policy Owner as part of the Application. See Charges and Deductions Provision TRANSFERS: Minimum Cash Value to be Transferred from any Insured s Account: $1,000 Minimum Cash Value Which Must Remain in a Segregated Account after a Transfer from any Insured s Account: $1,000 3

62 POLICY DATA SURRENDERS: Minimum Partial Surrender from any Insured s Account: $1,000 Minimum Cash Value Which Must Remain in the Insured s Account After a Partial Surrender: $1,000 ALLOCATION AND SURRENDER GUIDELINES: LOANS: 1. Currently, Policy Owner can select any or all of the Segregated Accounts available under this Policy. However, the Company reserves the right to limit this in the future. 2. Allocations must be in dollars or in percentages, stated in whole numbers. 3. Premium allocations are only made as of a Processing Date, which is also a Valuation Date, for the affected Segregated Account(s). 4. When the Company cannot allocate Premiums or Cash Value to the selected Segregated Account(s) because such funds become available at a time when the selected Segregated Account(s) are not accepting investments, the funds will be placed in the Cash Management Segregated Account pending investment or disposition. 5. The Company will make every effort to process partial surrender, transfer and Loan requests as of the next Processing Date following the date when the Company receives a request containing all of the required information. However, if the Company is not able to access sufficient funds in the applicable Segregated Account to process the request on such Processing Date, the request will be completed on the Liquidation Date following the Processing Date when sufficient funds become available. 6. Total Surrenders are paid within seven (7) days of the Liquidation Date after the Processing Date when the total surrender request was fully processed. Loan Account Interest Rate (Credited): Policy Loan Interest Rate (Charged): Minimum Loan Amount: Minimum Loan Repayment: 3.00% on an annualized basis 3.65% on an annualized basis $1,000 from any Insured s Account $1,000 for any Insured s Account 4

63 POLICY DATA VALUATION DATES: Cash Management Segregated Account: All other Segregated Accounts: Each Business Day The last Business Day of each month SEGREGATED ACCOUNTS: Cash Management Segregated Account: 10% [ ] Hedge Fund 90% SERVICE OFFICE: REGISTERED OFFICE: RIDERS/ENDORSEMENTS/AMENDEMENTS: The following Riders, Endorsements or Amendments are attached to the Policy and become a part hereof:. 5

64 SECTION I DEFINITIONS Accumulation Unit A unit of measure used to calculate Cash Value for Insured s Accounts in the Segregated Account(s). Application The questionnaire(s) to be completed by the Policy Owner prior to the issuance of a Policy by the Company. Application also refers to any questionnaire to be completed by each Insured (the Insured s Application ) as a condition to the Insured becoming insured under this Policy. Attained Age An Insured s Issue Age plus the number of full Insured s Account Contract Years elapsed since the Effective Date of the Insured s Account. Beneficiary The person(s) or entity(ies) described in the Application, unless changed, and who/which will receive the Net Death Benefit upon the death of any Insured under this Policy. Cash Surrender Value The Cash Value of an Insured s Account less any remaining Surrender Charge, if any, applicable to the Insured s Account. Cash Value The sum of all values of an Insured s Account under this Policy allocated to the Segregated Account(s) and the Loan Account. Company -, an exempt limited liability company which is licensed in Bermuda as a Class C insurer and is registered as a segregated accounts company under the SAC Act. Corridor Percentages The percentages used to determine the minimum Death Benefit that an Insured s Account must have in order to maintain its tax qualifying status under the IRC. Such minimum Death Benefit equals the result of multiplying the Insured s Cash Value by the appropriate Corridor Percentage for the Attained Age of the Insured. The Corridor Percentages are shown on the Policy Data pages. The Corridor Percentages are determined separately for each Insured. Cost of Insurance for an Insured The amount deducted monthly from an Insured s Account Cash Value to provide for the Death Benefit hereunder. The Cost of Insurance will be calculated and accounted for separately for each Insured under this Policy. Death Benefit The amount payable upon the death of an Insured before adjustment for Debt and charges and deductions made in arrears as may be applicable to an Insured s Account. Debt Any outstanding Loan plus accrued Loan interest charged as may be applicable to an Insured s Account. Face Amount The amount of coverage chosen by the Policy Owner for a specific Insured and in effect at the time of the death of the Insured, which is used to determine the Death Benefit Amount for the specific Insured. The initial Face Amount is shown on the Schedule of Insureds contained in the Policy Data pages. General Account An account of the Company containing all of the assets of the Company except those assets held in the Segregated Accounts. 6

65 Insured An individual named on the Schedule of Insureds which is contained in the Policy Data pages and upon whose death the Company will provide the Net Death Benefit to the Beneficiary(ies) according to the terms of this Policy. An Insured s Account will be established for each Insured under this Policy. Insured s Account An accounting established with reference to each Insured under this Policy which will be used to determine values and benefits as related to the specific Insured. Each Insured s Account will have associated with it, but not limited to, an Insured, a Face Amount, an Effective Date, Cash Value and a Maturity Date. Each Insured s Account, individually, will meet the definition of life insurance as provided for under IRC. An Insured has no rights and receives no benefits from such Insured s Account. Insured s Account Anniversary The first Insured s Account Anniversary is the 13 th Processing Date following the Effective Date of the Insured s Account. Subsequent Insured s Account Anniversaries occur on the 12 th Processing Date next following a previous Insured s Account Anniversary. Insured s Account Contract Year The approximate one year periods that are used to determine certain fees and charges to be deducted and other contractual events. The initial Insured s Account Contract Year begins on the Effective Date of the Insured s Account and ends on the day before the first Insured s Account Anniversary. Subsequent Insured s Account Contract Years begin on each Insured s Account Anniversary thereafter and end of the day before the next succeeding Insured s Account Anniversary. IRC - U.S. Internal Revenue Code of 1986, as amended. Issue Age An Insured s age last birthday as of the Effective Date of the Insured s Account. Life Expectancy The term life expectancy shall mean the Attained Age of an Insured when the Insured is presumed to expire. Loan An amount which is borrowed by the Policy Owner from the Net Cash Value of an Insured s Account. Maturity Date The Insured s Account Anniversary following the Insured s 100 th birthday. Maximum Surrender Charge The maximum amount, if any, that will be deducted from an Insured s Account Cash Value upon a total surrender of the values relating to the specific Insured s Account. The amount is shown in the Table of Maximum Surrender Charges set forth in the Policy Data pages. MEC A modified endowment contract is defined in IRC Section 7702(a) as a contract that qualifies as a life insurance contract within the meaning of IRC Section 7702 but fails to meet the 7-pay test prescribed in IRC Section 7702(b) or is received in exchange for a MEC. Loan Account That portion of an Insured s Account Cash Value which is used to account for Debt, as applicable to that specific Insured s Account. Net Amount at Risk The difference between the Death Benefit as applicable to a specific Insured and the Insured s Account Cash Value. Net Cash Surrender Value The Cash Surrender Value for an Insured s Account less any Debt as may be applicable to the Insured s Account. 7

66 Net Cash Value The Cash Value of an Insured s Account less Debt applicable to the Insured s Account. Net Death Benefit The Death Benefit as applicable to a specific Insured less any Debt as may be applicable to the Insured s Account and, if applicable, less any charges or deductions due but not yet deducted from the Insured s Account. Net Premium The Premium paid with respect to a specific Insured s Account less the Premium Charge and the Issue Charge, if applicable. Partial Surrender Charge A charge incurred when a partial surrender of Cash Value from a specified Insured s Account is effective. Partial Surrender Charges are shown on the Policy Data pages. Policy Owner The person(s) or entity(ies) entitled to all the ownership rights under this Policy. If Joint Policy Owners are named, all reference to Policy Owner shall mean Joint Policy Owners. Premium An amount paid to the Company by the Policy Owner as consideration for each Insured s Account. Private Act The private act entitled which received the assent of the Governor of Bermuda on, as amended from time to time. Registered Office The legal office of the Company to which any service of process regarding any dispute under this Policy must be delivered. Remaining Surrender Charge The Maximum Surrender Charge, if any, as applicable to an Insured s Account, determined at the time of the partial or total surrender, less the sum of any Partial Surrender Charges previously assessed against the Insured s Account. SAC Act The Segregated Accounts Companies Act 2000, as amended from time to time. Schedule of Insureds The list of individuals whose lives are insured under this Policy. The Schedule of Insureds is part of the Policy Data pages and is amended from time to time to reflect the inclusion and exclusion of persons from the list of Insureds whose lives are insured under this Policy. Segregated Account An account established by the Company, which is separate and distinct, pertaining to an identified or identifiable pool of assets and liabilities of such account, which are segregated and distinguished from the other assets and liabilities of the Company. Such Segregated Accounts are established and maintained in accordance with the SAC Act and Private Act. The Company may established segregated asset accounts which are not available under this Policy. Service Office The Office indicated on the Policy Data pages to which notices and Premiums must be sent. Sufficient Remaining Cash Value Loans The term Sufficient Remaining Cash Value Loans as used herein shall mean that amount of Net Cash Surrender Value estimated to be sufficient to continue an 8

67 Insured s Account in force on the same basis for the Life Expectancy of the Insured based on the Assumed Investment Return set forth below. Sufficient Remaining Cash Value Partial Surrender The term Sufficient Remaining Cash Value Partial Surrender as used herein shall mean that amount of Net Cash Surrender Value estimated to be sufficient to continue an Insured s Account in force for the Life Expectancy of the Insured based on an Assumed Investment Return and with a NAAR of not less than an amount equal to $1,000 for each $20,000 of the initial Net Amount at Risk. Surrender Charge A charge, if any, to be deducted in the event of a partial or total surrender of Net Cash Surrender Value from an Insured s Account. Surrender Charges are shown on the Policy Data pages. Tax Qualification Test One of two allowable definitions as set forth in the IRC Section 7702 that must be met in order for a life insurance policy to qualify as life insurance under the IRC. Each Insured s Account must meet either the Guideline Premium Test or the Cash Value Test. All Insured s Accounts under this Policy qualify under the Test designated under Tax Qualification Test on the Policy Data pages. 9

68 SECTION II GENERAL PROVISIONS A. Important Dates Issue Date: Death Benefit Change Anniversary: Effective Date: Business Day: Valuation Dates: Processing Date: Liquidation Date: This is the date when the Policy was issued by the Company. It is shown on the Policy Data pages. The Insured s Account Anniversary, or any subsequent Insured s Account Anniversary, as of which the Policy Owner can elect to change the Death Benefit Option to Option A from Option B for a specific Insured s Account. Each Insured s Account will have a Death Benefit Change Anniversary associated with it. This is the date when coverage under an Insured s Account began. It is shown on the Schedule of Insured s contained in the Policy Data pages. A Business Day is each day that the Bermuda Government, New York Stock Exchange and the Company are open for business. The various Business Days on which the Segregated Accounts will be valued. The Valuation Dates are shown on the Policy Data pages. If the Company is unable to value or determine the value of a Segregated Account s investments, the Valuation Date for such Segregated Account(s) shall be the next Business Day when the assets can be valued or determined. When only a portion of the Cash Value in an Insured s Account can be determined, the Company may, at its sole discretion, process the transaction only with respect to that portion. The remainder of the value will be processed on the next Business Day when such value can be determined. The Company may, at its sole discretion, use an estimated value to complete the transaction or determine the charge. When a valid value is determined, an appropriate adjustment will be made to reflect any correction from the estimated value to the valid value. The day each month as of which certain transactions, including the deduction of charges, are processed under this Policy. It is shown on the Policy Data pages. The date when the Death Benefit, surrender value, transfer amounts or Loan requests for any Insured s Account are determined after the transfer of the appropriate Insured s Account Cash Value (less the Loan Account) into the Cash Management Segregated Account and, with respect to the Death Benefit for a specific Insured, after the Company has received satisfactory due proof of death of the Insured. 10

69 B. The Entire Contract The Policy is a contract between the Policy Owner and the Company. The entire contract consists of: 1. This Policy; 2. The Application of the Policy Owner which is attached to this Policy; 3. Any riders, endorsements or amendments attached, or to be attached at any time in the future, to this Policy; and 4. Any Applications completed by the individual Insureds in order to become insured under this Policy. Statements made in any Application are considered representations and not warranties except in the case of fraud. No statement will void this Policy or any benefit hereunder or be used in defense of a claim unless made in an Application. C. Modification of Policy No agent has authority to change this Policy or waive any of its provisions. Any changes in this Policy will be binding on the Company only when endorsed by the President, Vice President, Secretary, Assistant Secretary or a Director of the Company. To the extent permitted by applicable laws and regulations, the Company may, without the Policy Owner s consent, make changes to the provisions of this Policy in order to maintain compliance with applicable Bermuda law or any other jurisdiction where such laws may have a bearing on this Policy, including, but not limited to, requirements for the definition of life insurance contracts under the IRC. All other revisions to the Policy require the consent of the Policy Owner. D. Assignment The Policy Owner may not assign this Policy without the prior written consent of the Company which consent will be in the sole and absolute discretion of the Company. E. Claims of Creditors To the extent permitted by law, no payments under this Policy will be subject to the claims of the payee s creditors. F. Misstatement of Age and/or Gender If the Age, date of birth or gender with respect to any Insured as given in an Application or Schedule of Insureds is not correct, the Face Amount of the Insured s account will be adjusted. The adjustment will reflect the death benefit amount that would have been provided by the most recent monthly Cost of Insurance charge using the correct Age and gender for the specific Insured. If the adjustment is made while the Insured is living, the Cost of Insurance charge thereafter will be based on the correct Age and gender of the specific Insured. 11

70 G. Non-Participating This Policy is non-participating and will not share in the Company s profits or surplus earnings. The Company will not pay dividends on the Policy. H. Reports At least once each Insured s Account Contract Year, the Company will furnish the Policy Owner with a report for all Insured s Accounts under this Policy showing the amount of Death Benefit, Cash Value, Net Cash Surrender Value, Premiums paid since the last report, the amount of Debt and any other information as may be required by law. Reports will be sent to the last known address of the Policy Owner. I. Notices and Elections All notices and elections made by the Policy Owner under this Policy will only be of effect if they are in writing, complete with all necessary information, signed by the Policy Owner and received by the Company at its Service Office. If the conditions in this paragraph have been fulfilled then, unless otherwise provided, all notices, requests, and elections will be effective when received by the Company. J. Suicide If within two (2) years from the Effective Date of an Insured s Account, the Insured dies by suicide, while sane or insane, the Company s liability will be limited to the Net Cash Surrender Value of the Insured s Account. K. Termination Coverage under an Insured s Account shall terminate upon the occurrence of any of the following: 1. The Policy Owner surrenders the Net Cash Surrender Value of the Insured s Account; 2. On the Maturity Date of the Insured s Account; 3. The Insured dies; 4. Total Debt equals or exceeds 90% of the Cash Surrender Value of the Insured s Account and a sufficient Premium payment or repayment of Loan, with respect to the Insured s Account, is not made within the grace period. Sufficient Premium payment or repayment of Loan shall equal at least the amount which reduces the Debt below 90% of the Cash Surrender Value of the Insured s Account; or 5. There is insufficient Cash Value in the Insured s Account to pay any Charges and Deductions that are due and a sufficient Premium payment or repayment of Loan, with respect to the Insured s Account, is not made within the grace period. Sufficient Premium payment or repayment of Loan is an amount which results in an allocation to the Cash Management Segregated Account of an amount at least equal to three times the current Monthly Deduction for the Insured s Account. 12

71 The Policy will terminate upon the occurrence of any of the following: 1. The Policy Owner surrenders the Net Cash Surrender Value for all of the Insured s Accounts hereunder; or 2. There are no longer any insureds under this Policy. A. Rescission, Cancellation or Termination i. In the event the Policy with respect to any or all of the Insured s Accounts hereunder is rescinded, cancelled or terminated pursuant to a judgment, award or decision in a Legal Proceeding (collectively, a Rescission Order ), the Net Cash Value of the affected Insured s Accounts shall be paid to the Policy Owner in accordance with Section X A. Surrender Provisions, as if the Policy Owner requested a total surrender of the affected Insured s Accounts. ii. iii. If the Rescission Order affects one or more of the Insured s Account, but not all, then pursuant to (i) above those Insured s accounts that are the subject of the Rescission Order shall be deemed to have been totally surrendered as of the Liquidation Date. In addition, in such circumstances, the Policy Owner may, within 30 days of the issuance of the Rescission Order, request a total surrender of all remaining Insured s Accounts. In the event of a Rescission Order and if the Company has paid the NAAR Beneficiary its portion of the Net Death Benefit upon the death of an Insured, the following will apply: a. If the Rescission Order affects all or some of the Insured s Accounts, any death benefit paid to the NAAR Beneficiary shall be deemed to have been paid in error with respect to those Insured s Accounts and the Company shall take commercially reasonable steps to obtain a refund of any such payment. b. If the Rescission Order affects only some of the Insured s Account and the Policy Owner requests a total surrender of all remaining Insured s Accounts pursuant to (ii) above, any death benefit paid to the NAAR Beneficiary after the effective date of the Rescission Order with respect to the remaining Insured s Account shall be deemed to have been paid in error and the Company shall take commercially reasonable steps to obtain a refund of any such payment. B. Adverse Award or Judgment. If a legal proceeding results in an award or judgment that requires the Company to make payment to a party or parties other than the Cash Value Beneficiary or the NAAR Beneficiary, the Company reserves the right to cancel or terminate the Policy with respect to all or some Insured s Account as appropriate. i. In the event of such cancellation or termination, the Net Cash Value of the affected Insured s Accounts will be paid to the Policy Owner as if the Policy Owner requested a total surrender of such Insured s Accounts. 13

72 ii. If the Company has paid the NAAR Beneficiary its portion of the Net Death Benefit upon the death of an Insured whose Insured s Account was affected by such award or judgment, such payment shall be deemed to have been paid in error and the Company shall take commercially reasonable steps to obtain a refund of any such payment. L. Maximum Net Amount at Risk The Maximum Net Amount at Risk for an Insured s Account is shown on the Schedule of Insureds contained in the Policy Data pages. If the Insured s Account Net Amount at Risk exceeds this Maximum, the Company reserves the right to reduce the Death Benefit under the Insured s Account and make any appropriate surrender of Cash Value or return Premiums, as they relate to the Insured s Account, in order to reduce the Net Amount at Risk below the Maximum Net Amount at Risk. M. Right to Refund To receive the tax treatment accorded life insurance under the IRC, the insurance under each Insured s Account must initially qualify and continue to qualify as life insurance under the IRC. To maintain qualifications to the maximum extent permitted by law, the Company reserves the right to return Premiums paid which the Company determines will cause any coverage under the Insured s Account to fail to qualify as life insurance under applicable tax laws and any changes in applicable tax laws or will cause it to become a MEC. Additionally, the Company reserves the right to make distributions to the extent the Company determines necessary to continue to qualify an Insured s Account as life insurance and to comply with additional laws. N. Disclosure of Information The Company may disclose information about the Policy, Policy Owner, Insureds, any Insured s Account, or Beneficiary(ies) to its parent, subsidiaries, affiliates and reinsurance companies in order to reinsure this Policy, or other persons or entities if and to the extent that the Company concludes that such disclosure is necessary in order to properly underwrite, reinsure or service the Insured s Accounts, the Policy and Policy Owner. The Company may also disclose such information to government agencies and other authorities as required by law. O. Incontestability Except in the case of fraud or for nonpayment of Premiums, any Insured s Account is incontestable as to statements made in the Insured s Application, if any, after the Insured s Account has been in force during the lifetime of the Insured for two (2) years from its Effective Date. Any contest will be limited to material misrepresentations in the Application completed by the Insured. P. Maturity Date An Insured s Account will terminate as of the Maturity Date and the Net Cash Value will be paid to the Policy Owner. This amount will be paid within seven (7) days of the Liquidation Date following the Maturity Date. The Maturity Date for any given Insured s Account is the Insured s Account Anniversary following the Insured s 121 st birthday. 14

73 Q. Currency All transactions between the Policy Owner and the Company will be made in U.S. dollars, unless otherwise agreed to by the parties. R. Governing Law This Policy is issue in Bermuda and is subject to the laws of Bermuda. Service of process regarding any dispute concerning this Policy shall be made personally, by courier, fax or messenger, to the Company s Registered Office or to the Policy Owner at the last known address in the Company s files. Any dispute arising under this Policy shall be tried solely and exclusively in Bermuda and governed by Bermuda law, including without limitation the Life Insurance Act of 1978, the SAC Act and the Private Act, excluding any conflicts of law provision. However, any court hearing such a dispute shall look to U.S. Tax law as applicable. 15

74 SECTION III OWNERSHIP AND BENEFICIARY A. General The Policy Owner is the person(s) or entity(ies) so named on the Policy Data pages, unless changed as provided for herein and so recorded and acknowledged by the Company, and has all the interest and rights under this Policy. The Policy can be owned by two or more Joint Policy Owners. Joint Policy Owners will have equal ownership rights and must all authorized any exercise of those ownership rights unless otherwise allowed by the Company or as may be provided for herein. B. Change of Policy Owner(s) The Policy Owner may not change Policy Owner(s) without the prior written consent of the Company, which consent will be in the sole and absolute discretion of the Company. C. Designation of Beneficiary The Beneficiary is the person or entity to whom the Company pays the proceeds upon the death of an Insured. The Company pays the proceeds to the primary Beneficiary(ies). If the primary Beneficiary(ies) has died, the proceeds are paid to the appropriately designated contingent Beneficiary(ies). If there are no surviving Beneficiary(ies), the Company pays the proceed to the Policy Owner. In the event that two or more persons are named as primary Beneficiaries or contingent Beneficiaries, the Company will assume the proceeds are to be paid in equal shares to the surviving Beneficiaries, unless otherwise specified. The Policy Owner must name a Beneficiary(ies) in the Application. This Beneficiary designation shall be the same Beneficiary(ies) for all Insured s Accounts unless otherwise indicated. The Policy Owner has the right to change Beneficiary(ies) unless the designation of the Primary Beneficiary(ies) has been made irrevocable. If an irrevocable Beneficiary(ies) has been designated, the Policy Owner and the irrevocable Beneficiary(ies) must act together to exercise all changes under this Policy, except transfers and Premium allocations which can be effected by the Policy Owner. Unless otherwise indicated, the right of an irrevocable Beneficiary(ies) to receive the proceeds and any other rights under this Policy applicable to an irrevocable Beneficiary(ies) are terminated if the irrevocable Beneficiary(ies) dies before the Insured. D. Change of Beneficiary The Policy Owner may not change the Beneficiary(ies) without the prior written consent of the Company, which consent will be in the sole and absolute discretion of the Company. E. Trustee If a trustee of a trust is the Policy Owner or a Beneficiary of this Policy, the Company s actions will be determined in accordance with the terms of this Policy without regard to the provisions of the trust agreement. The Company will not be responsible for the application or disposal of any money paid to a trustee. Any such payment shall fully discharge the Company s liability for the amount paid. 16

75 SECTION IV PREMIUM PROVISIONS A. Premiums The initial Premium for any Insured s Account is due on the Effective Date of the Insured s Account. The Company reserves the right to reject any Application from the Policy Owner on behalf of an Insured or any Premium. Subsequent Premiums are payable at the Policy Owner s discretion. However, the Company reserves the right not to accept any subsequent Premium payments. Premiums must be paid or sent to the Company at its Service Office or to a bank, brokerage or custodial account designated by the Company. A receipt, signed by an officer of the Company, will be provided upon request. The Company reserves the right to return Premiums paid for any Insured s Account which the Company has determined will cause any coverage under this Policy with respect to the Insured s Account to fail to qualify as life insurance. Additionally, the Company reserves the right to make changes in this Policy or to make a distribution of Cash Value from an Insured s Account to the extent the Company determines it is necessary to continue to qualify the Insured s Account as life insurance under Section 7702 of the IRC. B. Allocation of Premium to the Segregated Accounts When the Policy Owner completes the Application, he or she will select one or more Segregated Accounts and such selection must be made on form(s) provided by the Company. The initial Premium for each Insured s Account will be allocated to the Cash Management Segregated Account on the Effective Date of the Insured s Account until the next Processing Date, at which time the Cash Value representing the Premium payment and any increase in Cash Value attributable to the Premium payment will be transferred from the Cash Management Segregated Account to the selected Segregated Account(s). The initial Segregated Account selection will remain in effect until the Policy Owner informs the Company, in writing, of a new selection and will be used for the allocation of any subsequent Premiums and Loan repayments. Unless the Company is informed otherwise, all allocation instructions from the Policy Owner will apply to all Insured s Accounts. Allocation of the Premiums or Cash Value is subject to the Allocation and Surrender Guidelines set forth on the Policy Data pages which are subject to future modification with written notice to the Policy Owner. The Company reserves the right to allocate up to fourteen (14) times the average estimated Monthly Deduction for any Insured s Account Contract Year with respect to some or all of the Insured s Accounts to the Cash Management Segregated Account which will then be used to pay any charges under this Policy for the respective Insured s Account. The Company in its sole discretion will determine what amount is necessary to be maintained in the Cash Management Segregated Account. The Company reserves the right to limit the days upon which Premium payments can be made. No Beneficiary under the Policy shall have any right to influence or affect in any way the allocation of Premiums or Cash Value to any Segregated Account or the manner in which such Segregated Account is managed. C. Grace Period Even if subsequent Premiums are not made, an Insured s Account will remain in force as long as the Net Cash Surrender Value is sufficient to pay the Monthly Deduction. 17

76 If on any Processing Date the Net Cash Surrender Value for the Insured s Account is insufficient to pay the Monthly Deduction or any other applicable charges, the Insured s Account will terminate. The Company may also terminate an Insured s Account if the total Debt under the Insured s Account equals or exceeds 90% of the Cash Surrender Value of the Insured s Account. However, the Company will not terminate any Insured s Account until the end of the grace period. The grace period will end on the later of 61 days after the Processing Date when the grace period began, or 31 days after the Company sends a notice informing the Policy Owner that the Company will terminate the Insured s Account because of insufficient available Net Cash Surrender Value. In the event an Insured s Account is in a grace period, to avoid termination, the Policy Owner must submit a subsequent Premium, or a Loan repayment with respect to the Insured s Account, plus any overdue charges. This amount will be specified in the notice and will be an amount equal to three times the current Monthly Deduction. 18

77 SECTION V DEATH BENEFIT PROVISIONS A. Death Benefit The amount of Death Benefit under an Insured s Account depends on the Face Amount and the Cash Value of the Insured s Account on the Liquidation Date and the Death Benefit Option in effect on the date of the death of the Insured. The initial Face Amount for each Insured s Account is shown on the Schedule of Insureds. The initial Death Benefit Option for all Insured s Accounts, unless otherwise noted on the Schedule of Insureds, is set forth on the Policy Data pages. At the time of Application, the Policy Owner elects a Death Benefit Option for each Insured s Account, which may be Option A or Option B. The only change in Death Benefit Option that the Policy Owner can make is to elect to change from Option B to Option A, subject to certain restrictions on such an election. B. Death Benefit Option The following will be used to determine the Death Benefit amount upon the death of an Insured: Option A: The amount of the Death Benefit applicable to a specific Insured under Option A is the greater of: 1. The Face Amount of the Insured s Account; or 2. The Cash Value of the Insured s Account as of the Liquidation Date multiplied by the Corridor Percentage for the Insured s Attained Age as of the date of death as shown in the Table of Corridor Percentages set forth on the Policy Data pages. Option B: The amount of the Death Benefit applicable to a specific Insured under Option B is the greater of: 1. The Face Amount of the Insured s Account plus the Cash Value of the Insured s Account as of the Liquidation Date; or 2. The Cash Value of the Insured s Account as of the Liquidation Date multiplied by the Corridor Percentage for the Insured s Attained Age as of the date of death shown in the Table of Corridor Percentages set forth on the Policy Data pages. Upon notification of the death of an Insured, the Company will transfer all of the Cash Value of the Insured s Account (less the Debt) held in the selected Segregated Accounts into the Cash Management Segregated Account. The amount of the Death Benefit applicable to the specific Insured will be determined as of the Liquidation Date. This Death Benefit amount is reduced by any Debt and any Policy charges or deductions applicable to the Insured s Account due through the Liquidation Date but not yet deducted from the Insured s Account. This Net Death Benefit will be paid to the Beneficiary(ies) in a lump sum within seven (7) days after the later of the Liquidation Date or the receipt of all reinsurance proceeds with respect to the Insured into the Cash Management Segregated Account. The Net Death Benefit during a grace period is equal to the Net Death Benefit in effect immediately prior to the start of the grace period less any overdue charges. 19

78 When the Company calculates the Death Benefit on a date other than the death of the Insured, the following will all be as of the Processing Date when such Death Benefit is calculated; Death Benefit Option in effect, the Cash Value, the Corridor Percentage and the Attained Age of the Insured. Regardless of the Death Benefit Option, the Death Benefit with respect to an Insured s Account will never be less than that required by IRC Section 7702 in order for a life insurance policy to qualify as life insurance. C. Decrease in Face Amount The Face Amount of an Insured s Account may be decreased upon a written request received by the Company and is subject to the following: 1. A decrease may not take place prior to the first Insured s Account Contract Anniversary applicable to the Insured s Account as shown on the Schedule of Insureds; 2. The decrease will become effective as of the next Processing Date following the Company s processing of the request; and 3. Decreases will not be permitted which would reduce the Face amount of an Insured s Account to less than the minimum insurance amount for which the Insured s Account would qualify as Life Insurance under the applicable Tax Qualification Test of the IRC. Any reduced Face Amount can never be less than the Cash Value applicable to the Insured s Account as of the Liquidation Date multiplied by the Corridor Percentage applicable to the specific Insured shown in the Table of Corridor Percentages set forth on the Policy Data pages as of the Insured s Attained Age. The Company will provide the Policy Owner with an amended Schedule of Insureds to evidence the effectiveness of the decrease in the Face Amount of any Insured s Account. D. Death Benefit Change The Policy Owner may elect to change the Death Benefit Option from Option B to Option A (but not Option A to Option B) at any time, but such option will not become effective until the first available Death Benefit Change Anniversary, which is shown on the Policy Data pages. Any election to make such a change will be effective as of the next Insured s Account Anniversary after the change is elected for the specific Insured and after the Company receives the request from the Policy Owner at its Service Office provided that such Insured s Anniversary is no earlier than the first available Death Benefit Change Anniversary. In addition to a change in the Death Benefit Option, the Face Amount of any Insured s Account can be reduced in accordance with Section V-C above. If prior to a reduction in the Face amount, the Insured s Account was not a MEC and reducing the Face Amount will cause the Insured s Account to be deemed a ME, then a notice will be sent to the Policy Owner advising of the consequences of processing the election request. In these circumstances, the Company will only process such an election after the Policy Owner has provided the Company with written notice that the election is to be processed. The first available Death Benefit Change Anniversary for an Insured s Account is shown on the Policy Data pages. The Policy Owner may elect to change the Death Benefit Option on any subsequent Insured s 20

79 Account Anniversary subject to the same notice requirement if processing the election will cause the Policy to become a MEC. If the Policy Owner elects a change in Death Benefit Option pursuant to this section, the Company will provide the Policy Owner with amended Policy Data pages to evidence the effectiveness of the change in Death Benefit Option. Such amended Policy Data pages will become a part of the Policy. E. Due Proof of Death Due proof of death of an Insured hereunder is required and must be satisfactory to the Company. The following must be received at the Company s Service Office: 1. A. certified copy of a death certificate; or B. a certified copy of a decree of a court of competent jurisdiction as to the finding of death; and 2. Any other information or documentation which the Company may request. This includes any medical evidence deemed appropriate by the Company. F. Limits on Payment of Death Benefit The Company may defer the right to payment of the Death Benefit for any period when the Suspension or Deferral of Payment provision is in effect. 21

80 A. The Segregated Accounts SECTION VI SEGREGATED ACCOUNT PROVISIONS The Company has established certain Segregated Accounts which it has made available for the allocation of Net Premiums and unloaned Cash Value for the Insured s Accounts under this Policy and other policies eligible to select such Segregated Accounts. At the time of Application, the Policy Owner selects one or more of the eligible Segregated Accounts into which the Net Premium(s) will be allocated and which may be changed by written notice to the Company on a form acceptable to the Company. All income, gains and losses, whether or not realized, from assets allocated to a Segregated Account, are credited to or charged against such Segregated Account without regard to other income, gains, or losses of any other Segregated Account or the General Account of the Company. The Segregated Accounts available on the Effective Date are shown on the Investment Selection Form executed by the Policy Owner. The Company may, from time to time, in its absolute discretion, add additional Segregated Accounts or delete Segregated Accounts that may be elected by the Policy Owner. The Policy Owner may be permitted to allocate Net Premium or transfer unloaned Cash Value to the additional Segregated Accounts made available to the same class of policies as this Policy. However, the right to make any transfer or allocation will be limited by the terms and conditions then imposed by the Company, including but not limited to the Allocation and Surrender Guidelines set forth on the Policy Data pages, which are subject to future modifications with written notice to the Policy Owner. In the event the Company deletes a Segregated Account, it may do so with respect to subsequent Premium payments or to existing allocations of Cash Value. In the event of a deletion, the Company will send the Policy Owner a notice setting forth instructions and options. Any change in investment selection by the Policy Owner shall be pursuant to the then current transfer procedures. Unless the Policy Owner notifies the Company to the contrary, all investment selections and allocations will be applicable to all Insured s Accounts. All income, gains and losses, whether or not realized, from assets allocated to a Segregated Account, are credited to or charged against such Segregated Account without regard to other income, gains or losses of any other Segregated Account or the General account of the Company. No claims under this Policy may be paid from any Segregated Account unless and to the extent that Cash Values or other proceeds relating to the Policy have been allocated to such Segregated Account. The assets of any Segregated Account, equal to reserves and other liabilities of this Policy and those of other Policy Owners, will not be charged with liabilities arising out of any other business the Company may conduct. Any moneys or proceeds receivable or received by the Company under any coverage against loss relating to this Policy shall form a part of the assets of and be payable to the Cash Management Segregated Account and shall not be available to any other Segregated Account or the General Account of the Company or claimant thereunder. The Company accounts for and reports values for each Insured s Account separately. Each Segregated Account is separate, distinct and identifiable from other Segregated Accounts and the General Account of the Company. The Segregated Accounts were established and are maintained in compliance with SAC Act and Private Act. The rights and claims, with respect to investments, properties or assets in a Segregated Account, are defined by SAC Act, the Private Act, and the terms of this Policy and the other policies eligible to select such Segregated Account and for which Cash Values have been 22

81 allocated to the Segregated Account. No other rights or interests shall exist. All Net Premiums and Cash Value allocated to any Segregated Account pursuant to this Policy will be commingled with all funds received from any other policy that invests in the same Segregated Account. Pursuant to the terms of the Policy, SAC Act and the Private Act, and notwithstanding any statutory provision or rule of law to the contrary, on the commencement of proceedings to wind up the Company, and in winding up of the Company, a liquidator shall (a) be bound to recognize the separate nature of each Segregated Account and (b) preserve the investments, properties and assets in each Segregated Account and ensure, where applicable, that such investments, properties and assets are preserved and managed in the ordinary course for the benefit of the Policy Owners having an interest therein. The Company reserves the right to modify the structure or operation of any or all of the Segregated Account(s). In such an event, such modification will not affect the value of the Policy or any Insured s Accounts thereunder. B. Valuation of Assets The assets of the Segregated Account are valued as of the various Valuation Dates set forth in the Policy Data pages at their fair market value in accordance with the procedures of the Company. 23

82 A. Cash Value of an Insured s Account SECTION VII CALCULATION OF VALUES The Cash Value of an Insured s Account under this Policy is the total of all values under the Insured s Account held in the Segregated Account(s) selected by the Policy Owner and in the Loan Account, if there is a Loan outstanding with respect to the Insured s Account. The Insured s Account Cash Value reflects Net Premiums applicable to the Insured s Account, Monthly Deductions from the Insured s Account, the investment experience of the Segregated Account(s) selected, including any investment management fees and operating expenses of the Segregated Accounts, the value of amounts allocated to the Loan Account with respect to the Insured s Account, interest credited to the amount allocated to the Loan Account, the deduction of any Loan Transaction Fee, the deduction of any Transfer Fee, deductions due to any partial surrender and deductions of any other fees or charges as applicable to the Insured s Account. B. Net Cash Value of an Insured s Account An Insured s Account Net Cash Value equals: 1. The Cash Value of the Insured s Account; less 2. Any Debt applicable to the Insured s Account C. Cash Surrender Value of an Insured s Account An Insured s Account Cash Surrender Value equals: 1. The Cash Value of the Insured s Account; less 2. The Remaining Surrender Charge, if any, applicable to the Insured s Account. D. Net Cash Surrender Value of an Insured s Account An Insured s Account Net Cash Surrender Value equals: 1. The Cash Surrender Value of the Insured s Account; less 2. Any Debt applicable to the Insured s Account. E. Accumulation Units In order to determine an Insured s Account values in the Segregated Account(s), the Company uses Accumulation Units which are calculated separately for each Segregated Account. The Accumulation Unit value for each Segregated Account will vary to reflect the investment experience, and fees, charges and operating expenses of the Segregated Account. The value of an Accumulation Unit will be determined as of each Valuation Date for the Segregated Account. 24

83 When Premiums are accepted, the Company will credit the appropriate Insured s Account with Accumulation Units. The number of Accumulation Units is determined by dividing the amount of the Net Premium or Cash Value allocated on behalf of the Insured s Account to a Segregated Account by the value of the Accumulation Unit for that Segregated Account. When the Company assesses the Monthly Deduction or any other fee or charge that is to be deducted from the Insured s Account, it does so by deducting Accumulation Units from the Insured s Account. When a Loan, transfer or partial surrender is requested, a reduction in the number of Accumulation Units in the selected Segregated Account(s) will result. When the Monthly Deduction is made Accumulation Units will also be deducted. F. Suspension or Deferral of Payments The Company may suspend the calculation of Accumulation Units and payment of any benefits under the Policy in the following circumstances: 1. If there is a breakdown in any of the means normally employed in ascertaining the prices or values of investments, properties or assets of a Segregated Account; 2. If, for any reason the prices or values of investments, properties or assets in a Segregated Account cannot be reasonably ascertained; 3. If circumstances exist as a result of which it is not reasonably practicable to realize any of a Segregated Account s investments or to determine fairly the net asset value of a Segregated Account; 4. If the remittance of funds involved in the realization of, or in the payment for investments or any payments due under this Policy cannot be carried out without undue delay and at normal rates of exchange; or 5. With respect to a death claim, if for any reason, payment of the reinsurance proceeds with respect to benefits due upon an Insured s death is delayed. Notice of the imposition and subsequent lifting of any such suspension will be given to Policy Owners, assignees of record and any irrevocable Beneficiaries. Payments which were due to have been made and which were deferred following the suspension of the calculation of Cash Values will be made for the affected Segregated Account(s) as of the Liquidation Date following the Valuation Date when valid values are available. Calculation of Sufficient Remaining Cash Value Loans or Partial Surrender In determining the amount of Sufficient Remaining Cash Value Loans or Sufficient Remaining Cash Value Partial Surrenders, the following will apply: A. Illustration. When a Policy Owner makes a request for a Loan or partial surrender from an Insured s Account, the Company shall within 10 days of the request provide Policy Owner with a Hypothetical Illustration to verify that Sufficient Remaining Cash Value Loans or Partial Surrender will remain in the Insured s Account after the transaction. Such illustration will use the then current cost of insurance rates and other applicable charges. The Company shall, in its sole 25

84 discretion, make the determination of whether or not a requested transaction complies with these provisions. B. Life Expectancy. Life Expectancy, as used herein, is determined in accordance with the 2001 CSO M/F Ultimate Mortality Table, Age Last Birthday. C. Assumed Investment Return. In preparing the Hypothetical Illustration as provided for in A above, the Company will use an Assumed Investment Return of four percent (4%). 26

85 SECTION VIII LOAN PROVISIONS A. Policy Loans While the Policy is in force and not in a grace period, the Policy Owner may borrow from any Insured s Account still in force. Loans can only be effected as of the Liquidation Date following the Processing Date when the Loan request was processed. The Allocation and Surrender Guidelines then in effect will apply except for any minimum allocations. The Policy Owner must make the request for a Loan in writing and with all of the required information. A Loan Transaction Fee is deducted from the amount borrowed or the amount repaid in accordance with Section XI-I of this Policy. A Loan will be made solely on the security of the Insured s Account(s) from which the Loan(s) was made. No Beneficiary under the Policy shall have any right to borrow or make a surrender of the Cash Value from any Insured s Account. B. Loan Amounts The minimum Loan amount is shown on the Policy Date pages. The maximum Debt under any Insured s Account is equal to 90% of the Cash Surrender Value of the Insured s Account. The Policy Owner may borrow from an Insured s Account, only to the extent Sufficient Remaining Cash Value Loans remains in the Insured s Account after the Loan transaction. When a Loan is taken out, the Loan amount requested plus the Loan Transaction Fee is transferred out of the Segregated Account(s) selected by the Policy Owner into the Cash Management Segregated Account and the Loan amount is then paid to the Policy Owner. A Loan will result in the reduction of the Insured s Account Cash Value in the Segregated Account(s). When a Loan is taken out and the funds paid to the Policy Owner, the Company will establish a Loan Account for any affected Insured s Account. The Loan Account value is a part of the Cash Value of the Insured s Account. The Company will send the funds to the Policy Owner within seven (7) days of the Liquidation Date next following the Processing Date when the Loan transaction was processed. C. Loan Interest (Charged) Loan interest due on any Loan will accrue daily at the Loan Interest Rate (Charged) shown on the Policy Data pages and will be reflected in the amount of Debt. D. Loan Interest (Credited) The Loan Account will be credited daily with interest at the Loan Account Interest Rate (Credited) shown on the Policy Data pages and will be reflected in the Loan Account balance. E. Loan Repayments All or part of a Loan may be repaid as of a Processing Date next following receipt of a Loan repayment so long as the Insured s Account is in force and the Insured is alive. The Minimum Loan Repayment is shown on the Policy Data pages. To repay a Loan in full, the Policy Owner must pay a sufficient amount to cover the full Debt including the Loan Transaction Fee. Any Loan repayment will reduce the Loan Account balance. Unless the Policy Owner directs otherwise, all funds received while a Loan is outstanding will 27

86 first be considered as a payment of any Loan interest due, then as a Loan repayment, then as a subsequent Premium. Failure to repay any Loan or to pay interest shall not terminate the Insured s Account unless the total Debt applicable to the Insured s Account equals or exceeds 90% of the current Cash Surrender Value. Upon termination of the Insured s Account and the payment to the Policy Owner of any Net Cash Surrender Value of the Insured s Account, the Loan will be considered paid in full and no further interest will be credited or charged as a result of the Loan. F. Limits on Rights to a Loan The Company may defer the right to a Loan for any period when the Suspension or Deferral of Payments provision is in effect. 28

87 SECTION IX TRANSFERS A. General The Policy Owner may transfer unloaned Cash Value in any Insured s Account among the Segregated Accounts available to this Policy subject to the conditions set forth below. The Allocation and Surrender Guidelines will apply to a Transfer. The Policy Owner must make the request for a transfer in writing containing all the required information. B. Conditions All transfers are subject to the following conditions: 1. The Transfer Fee as shown on the Policy Data pages. The Transfer Fee is deducted from the appropriate Insured s Account Cash Value in the Segregated Account(s) from which the transfer is made. However, if the entire interest of the Insured s Account in a Segregated Account is being transferred, the Transfer Fee will be deducted from the amount which is transferred. When funds are to be transferred from multiple Segregated Accounts, the Transfer Fee will be allocated proportionately based on the amount transferred from each Segregated Account or the Policy Owner can request that the free be taken in a different manner acceptable to the Company. If a transfer from multiple Segregated Accounts is made pursuant to a single transfer request, only one Transfer Fee is assessed; 2. Transfers of Cash Value of an Insured s Account out of a Segregated Account will be effected as of the Liquidation Date following the Processing Date when the transfer request was processed. The Company will transfer the appropriate amount out of the Cash Management Segregated Account into the selected Segregated Account(s) as of the next Valuation Date for the Segregated Account(s); 3. Any transfer request must clearly specify: (a) the amount which is to be transferred; (b) the Segregated Account(s) which are to be affected; and (c) if not all Insured s Accounts are affected, which Insured s Account are affected by the transfer request; and 4. The minimum amount which can be transferred is shown on the Policy Data pages. The minimum amount which must remain in a Segregated Account is shown on the Policy Data pages. C. Limits on Rights of Transfer The Company reserves the right at any time and without prior notice to any party to terminate, suspend, or modify the transfer privileges described above. The Company may also defer the right to make transfers for any period when the Suspension or Deferral of Payments provision is in effect. 29

88 SECTION X SURRENDER PROVISIONS A. Total Surrender After the Insured s Account has been in force for 60 days, the Policy Owner shall not have the right to make a total surrender, except as provided for below under Termination. B. Partial Surrenders After the Insured s Account has been in force for 60 days, the Policy Owner may make a Partial Surrender of an Insured s Account Net Cash Value, only to the extent that Sufficient Remaining Cash Value Partial Surrender remains in the Insured s Account after the Partial Surrender. The Policy Owner must make the request for a partial surrender in writing and with all the required information, including the amount or percentage to be deducted from each Segregated Account from which the Partial Surrender is to be made. The Company will pay the Policy Owner the amount of any partial surrender, less the Partial Surrender Charge, if any, shown on the Policy Data pages, in accordance with the Allocation and Surrender Guidelines. Any Partial Surrender Charge is deducted from the amount surrendered. If at the time the partial surrender is requested, the Remaining Surrender Charge, if any, applicable to the Insured s Account is less than the Partial Surrender Charge, then the partial surrender is not permitted. Each partial surrender must be for an amount which is not less than the amount shown on the Policy Data pages. The Cash Value which must remain in the Insured s Account after a partial surrender is shown on the Policy Data pages. If any partial surrender leaves less than the stated amount, the Company may require the Policy Owner to request a surrender of all of the Cash Value with respect to the Insured s Account in the Segregated Account or to transfer the remaining Insured s Account Cash Value to other Segregated Accounts where there is sufficient Cash Value. If the Death Benefit Option with respect to the affected Insured s Account in effect at the time of the partial surrender is Option A, each partial surrender will reduce the Face Amount dollar for dollar. No partial surrender will be permitted unless the reduced Face Amount complies with the requirements set forth in Section V-C.3. C. Limits on Surrender Rights The Company may defer surrender rights for any period when the Suspension or Deferral of Payments provision is in effect. 30

89 SECTION XI CHARGES AND DEDUCTIONS A. Monthly Deduction As of each monthly Processing Date the Company will make certain deductions from each Insured s Account Cash Value. The Monthly Deduction is for: 1. The Monthly Cost of Insurance Charge for the specific Insured for the preceding full or partial month; plus 2. Mortality & Expense Risk Charge for the preceding full or partial month; plus 3. If the monthly Processing Date corresponds to the Insured s Account Anniversary, the Annual Account Maintenance Charge. The Monthly Deduction will be deducted first from the Cash Management Segregated Account, to the extent available, and then from any other Segregated Account that has liquidity, as determined by the Company in its sole discretion. The Monthly Deduction is deducted up to and including the last Processing Date prior to the Liquidation Date relating to the death of the Insured. B. Monthly Cost of Insurance The Monthly Cost of Insurance Charge is equal to: 1. The Cost of Insurance Rate applicable to the specific Insured calculated for the applicable period, per $1,000, multiplied by 2. The Net Amount at Risk applicable to the Insured s Account; divided by 3. $1000. The Cost of Insurance Charge is based on the Attained Age and gender of the Insured. The Company may charge less than the maximum Monthly Cost of Insurance, which is based on the Guaranteed Cost of Insurance Rates shown on the Policy Data pages. In that case, the Company will use Cost of Insurance Rates that are less than, but never more than, the Guaranteed Rates. The Company will determine, as frequently as monthly and not less than once a year, the actual Cost of Insurance Charge and all other expense factors provided for herein based on its expectation of future experience for mortality, investment experience, persistency, expense results, Policy claims, taxes and future profits. C. Mortality and Expense Risk Charge A Mortality and Expense Risk Charge is deducted monthly from the Net Cash Value of the Insured s Account. The annual Mortality and Expense Risk Charge is shown on the Policy Data pages. The charge is calculated and deducted monthly as part of the Monthly Deduction. 31

90 D. Premium Charge On the Effective Date and when there is a payment of a subsequent Premium for any Insured s Account, the Company will deduct the Premium Charge which is shown on the Policy Data page. The charge will be deducted from each Premium payment. E. Issue Charge On the Effective Date, the Company will deduct from the Initial Premium for any Insured s Account the Issue Charge, which is shown on the Policy Data pages. F. Annual Account Maintenance Charge The Company deducts the Annual Account Maintenance Charge, shown on the Policy Data pages, from the Cash Value of the Insured s Account, as part of the Monthly Deduction, as of the last Processing Date of each Insured s Account Contract Year. G. Surrender Charges A Surrender Charge, if any, is deducted in the event of a surrender of all or a portion of the Net Cash Surrender Value. The Surrender Charge is shown on the Policy Data pages. Partial Surrender Charge In the event of a partial surrender of the Net Cash Surrender Value of an Insured s Account, a Partial Surrender Charge, if any, is deducted in accordance with Section X Surrender Provisions, B. Partial Surrenders. Remaining Surrender Charge In the event of a total surrender of the Net Cash Surrender Value of an Insured s Account, the Remaining Surrender Charge, if any, with respect to the Insured s Account, if any, will be deducted. H. Transfer Fee A Transfer Fee is deducted in the event of a transfer of Cash Value of an Insured s Account from one Segregated Account to another, in accordance with Section IX-B. The Transfer Fee is shown on the Policy Data pages. If a Premium or Cash Value is allocated to the Cash Management Segregated Account pursuant to items #4 or #5 of the Allocation and Surrender Guidelines set forth on the Policy Data pages, no Transfer Fee will be assessed when such amounts are transferred from the Cash Management Segregated Account to the selected Segregated Accounts. I. Loan Transaction Fee Whenever the Policy Owner borrows, or increases a Loan from an Insured s Account, a Loan Transaction Fee, as shown on the Policy Data pages, is deducted from the amount borrowed. Whenever there is a Loan repayment, a Loan Transaction Fee will be deducted from the Loan repayment before being credited to the affected Insured s Account. The Loan Transaction Fee is shown on the Policy Data pages. 32

91 J. Investment Management Fees and Operating Expenses The Investment Management Fees described on the Policy Data pages and the operating expenses of each Segregated Account are deducted from the assets of the appropriate Segregated Accounts. K. Taxes Any taxes paid to any governmental entity relating to this Policy or any Insured s Account hereunder will be deducted from Premiums or Cash Values when incurred. The Company may, in its sole discretion, determine when taxes have resulted from the investment experience of the Segregated Account(s) or receipt by the Company of Premiums. The Company may, in its sole discretion, pay taxes when due and deduct such amounts from the Cash Value of the applicable Insured s Account at a later date. Payment by the Company at an earlier date does not waive any right the Company may have to deduct amounts at a later date. 33

92 U sing Private Placement Insurance Products to Achieve Tax Efficiency for High Net Worth Investors Gerald R. Nowotny* Although no one can predict what Congress will do at any point, it is quite likely we will see higher income tax rates in the near future, along with an increase in federal estate tax rates and a decrease in available income tax deductions. For high net worth investors, private placement insurance contracts could be the solution to tax planning in an unfriendly tax environment. These investment vehicles allow for investment customization and provide for the possibility of stronger and more consistent investment peiformance, while also offering attractive tax benefits. The author explains several options within the realm of private placement insurance, and analyzes the related investment and tax planning issues. Introduction This article is designed to provide an overview of the benefits of private placement life insurance (PPLI) and private placement variable deferred annuity products (PPVA) for ultra-high net worth investors. PPLI is an institutionally priced variable universal life policy designed for accredited investors and qualified purchasers as defined under federal securities law. The policy allows for customized investment options which may include alternati ve investments such as hedge funds. PPVA is an institutionally priced variable deferred annuity which allows for customized investment options as well. * Gerald R. Nowotny. J.D., LL.M., is a consultant with Long Gray Line Consulting, LLC, in Avon, cr. He is a specialist in cllstomized insurance solutions using private placement insurance products. He may be contacted by [email protected]. 49

93 50 JOURNAL OF TAXATION OF INVESTMENTS In spite of volatile equity markets, the retail variable life and annuity marketplaces, according to The IRI Fact Book, have $1.5 trillion of assets under management.! Obviously, this is no small amount of capital. How has so much capital found its way into variable insurance products? The use of the phrase "good investment" with life insurance has long been considered to be an oxymoron. Traditional life insurance products have been too laden with heavy front-end sales charges and limited investment flexibility for sophisticated buyers such as high net worth individuals and large institutions. This sales phenomenon has occurred in spite of the significant tax advantages that life insurance enjoys in comparison to other financial products. TI,e evolution of the PPLI and PPVA marketplaces for high net worth individuals has its origins with the growth of the hedge fund industry for high net worth investors. The sophisticated hedge fund investor whose yields are regularly driven down by the substantial tax rates imposed on ordinary income and short-term capital gains is acutely aware of the tax inefficiency of hedge funds. Hedge fund managers have attempted to utilize various investment swaps (also known as total return swaps) to convert a portion of the investment income into long-term capital gain; however, none of these strategies offers the comprehensive tax advantages of PPLI. Private placement insurance products still represent a small percentage of the assets under management within life insurance company separate accounts. The author's non-scientific review would suggest that private placement insurance assets are dispersed as follows:' Private Placement Group Variable Deferred Annuity Contracts $25 billion; High Net Worth Private Placement Assets: domestic-$7.5 billion; offshore-$2.5 billion. The relative paucity of separate account assets in high net worth PPLI is largely the result of marketing and distribution problems. Unlike retail life insurance, this relatively complex life insurance product does not have the high commission structure to support a "big bang" for the marketing "buck." Traditional life insurance agents with commission levels as high as 95 percent of target premium (commissionable premium level) will frequently sell against PPLI as a better option for the client. This is a case of mistaken identity, by which I mean that the traditional life insurance agent confuses the insurance dollar allocated for a traditional insurance need with an investment I Insured Retirement Institute, IRJ Fact Book 201 J, at Based on the author's informal non-scientific survey of senior management of several domestic and offshore life insurers.

94 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 51 dollar being reallocated for a more tax-advantaged investment return. Nevertheless, PPLI is an excellent choice for traditional estate planning/wealth transfer planning purposes. As the cliche goes, you need to follow the money to understand why the life insurance industry has not sold more PPLI. The lack of high net worth PPLI premium volume to this point in time has nothing to do with the viability and planning and investment benefits of PPLI relative to retail variable insurance products, but rather results from the lack of agent compensation for selling the product. It is the most complex insurance product that compensates the life insurance agent like an investment product. This article will examine and address the benefits of private placement insurance products, planning uses for these products, and relevant tax authority. Variable vs. General Account Insurance Products Variable insurance products are different from general account (or "fixed") insurance products. In the latter, the contractual promises of the insurance contract are supported by the insurer's general account assets, Le., the assets of the insurance company. These assets are invested according to state insurance regulation-largely in investment grade fixed income assets and mortgages.' State insurance law allows for a minimal amount of investment exposure in equities-public or private.' The financial solvency tests (also known as risk-based capital ratios) of the independent rating agencies also consider the liquidity of the general account assets as part of the company's financial strength to meet its contractual promises. These general account assets are subject to the claims of the insurer's creditors. Separate account assets, while also assets of the insurer, are segregated by state insurance statutes from the claims of the insurer's general creditors.' J American Council of Life Insurers, ACLI Fact Book 2011, at 28, available at hup:/1 R aspx. As of the end of 2010, U.S. life insurers had $3.5 trillion in general account assets and another $1.9 trillion in separate account assets. Long-Lenn bonds represented 72.5 percent of total general account assets. Stocks represented only 2.5 percent of general account assets. Mortgages represenled 9.2 percent of general account assets with the majority committed 10 commercial mortgages. Cash holdings represented 1 percent of general account assets. See N.Y. Ins. L. 1405; TIAA-CREF Newsl., Summer 2011, at 3. TIAA-CREF, a life insurer domiciled in New York, provides a good example of the application of the rules of a state insurance regulator on general account investments. Investments in U.S. real estate are limited to 20 percent of the general account. Investments in U.S. common stock and nonpreferred equity securities are limited percent. Investments in emerging market debt are limited lo 4 percent. Investments in below-investment grade bonds are limited to less than 10 percent. 5 Mass. Gen. L. 175 and 132F are a good example of the typical separate account insurance laws. Separate account investments are segregated bookkeeping entries of the insurer. They are not trusts or held in a separate legal entity. Separate account in vestments belong to and are titled in the name of [he insurance company. The policyholder has no right

95 52 JOURNAL OF TAXATION OF INVESTMENTS The investments of the insurer's separate account for variable life insurance and annuity policies provide a direct pass-through of investment performance to policyholders. These investment funds within retail val'iable insurance products are large ly registered funds or subaccounts managed by mutual fund companies. Life insurers have done a marvelous job of manufacturing and distributing variable insurance products. It also helps that the life insurance industry has a very powerful lobbying group in Washington, D.C., the American Council of Life Insurers (ACLD.' In the face of volatile insurance markets, life insurers introduced policy riders to variable annuities which provide for a guaranteed long-term investment return that is reasonably competitive in the current marketplace and not available in competing investment products along with the tax deferral enjoyed by annuity contracts. Even in the volatile equity markets of the last two to three years, life insurers selling variable annuities have managed to add $141 billion of new premiums in 2011.' Tax Advantages of Life Insurance Life insurance has enjoyed significant tax advantages for decades. In general, life insurance offers five distinct tax benefits: I. Tax-deferred "inside build-up" of policy cash values:' This is the "sacred cow" of the life insurance industry, which has preserved the tax preferred treatment of life insurance for decades. Over the past 25 years, numerous proposals to change the tax treatment of life insurance have disappeared in a matter of hours after issuance. For example, during the Clinton Administration a proposal to tax the inside build-up of life insurance was withdrawn from consideration in a matter of days. At the beginning of the Obama Administration, an annual reporting requirement for life insurers to direct the purchase and sale of a separate account asset. lncorne and losses pass through to the policyholder. Separate account assets are included in the annual financial statements of the life insurer. The separate account assets are reported to the state insurance commissioner in the state of domicile in the "Green Book." 6 The American Council of Life Insurers, headquartered in Washington, D.C., is the trade association for over 300 hundred life insurers representing over 90 percent of the assets and premiums of the U.S. life insurance industry. For more information, see com. 7 Noah Buyahar, "U.S. Variable Annuity Sales as Prudential, MetLife Report Gains," Bloomberg Online (Feb. 17,2011), available at hup:/iwww.bloomberg.com/news! /u -s- variable-annui ty -sales-rise-ied-by-prudential-metlife.h tm I. S See IRe 7702 (tax law definition of life insurance). Unless specifically otherwise indicated, all references to "Section" are to the Internal Revenue Code of 1986 as amended (the IRC) or the regulations thereunder.

96 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 53 was proposed, requiring reporting for separate accounts with 10 or fewer policyholders. This proposal seemed to disappear to the bottom of the heap very quickly, never seen or heard from again. The collective clout of the industry and its agents results in a powerful political force. 2. Non-recognition of capital gains: A policyholder has the ability to switch investment options within the product without triggering taxation, because life insurance separate accounts-and not the policyholders-are legally the owners of the investments within variable insurance products. The life insurer receives a reserves deduction equal to its investment income.' 3. The option of tax-free access to policy cash values through a partial surrender of the cash value and low-cost policy loans: Life insurance policies receive LIFO treatment. A policyholder may take a partial surrender of the cash value and recover his tax basis in the contract first. Policy loans with a net cost of approximately basis points per annum also receive income-tax-free treatment. The policy's basis is its cumulative premiums.'" A policyholder who has recovered his basis in the contract has a contractual right to a policy loan, which allows the policyholder to borrow up to 90 percent of the policy cash value. I! 4. In come-taxjree death benefit:" The policy cash value grows on a tax-free basis. The policyholder can access investment gains within the policy on a tax-free basis during lifetime, and beneficiaries receive the death benefit income-tax-free. 5. Estate-tax-free death benefits through the use of third-party ownership of the policy: A policy can be owned by a third party such as an irrevocable life insurance trust (ILIT). Section 2042 provides that, as long as the insured does not retain any incidents of ownership within the policy, the death proceeds will not be included in the taxable estate of the decedent." The legislative intent behind these tax advantages is rooted in social policy designed to encourage household savings and insurance protection, i.e., insurance for "widows and orphans." The insurance industry has fiercely 'I IRe 807(a) and (b) provide that a life insurer receives a reserves deduction equal to the investment income of the separate account. '" See IRe 72(e)(6). \I See IRe 72(e)(5). 11 See IRe 101(a)(I). II See IRe 2042(2).

97 54 JOURNAL OF TAXATION OF INVESTMENTS guarded these longstanding benefits in the Internal Revenue Code over the years through a well-organized and funded effort. Development of PPLI Drawbacks of General Account Products for High Net Worth Individuals. Investors, both high net worth and regular folks, have long realized the potential opportunities of life insurance as a tax-advantaged investment. The life insurance industry has marketed permanent life insurance as a supplemental retirement vehicle for decades. Traditional general account life insurance products produce conservative investment results, however. The policy's investment return or crediting rate is tied to the investment return of the insurer's general account assets. The crediting rate for permanent policies issued by mutual life insurance companies is reflected in the life insurer's dividend scale. Stock life insurance companies issue interest-sensitive policies. The investments of the general account are restricted by statute and are primarily comprised of investment grade bonds and mortgages. General account products have been primarily distributed through the general agency system for the last century. These products were designed for mass distribution and carry high front-end sales loads in order to compensate the life insurance distribution system. Because these sales loads provide an adverse reduction, or "drag," on the investment performance of the general account policies, they have had little investment appeal to sophisticated longterm investors despite any tax advantages that the products might offer. COLI Policies. Corporate Owned Life Insurance (COLI) buyers are generally Fortune 500 companies that use permanent life insurance to recover the costs of funding supplemental executive retirement programs (SERFs) and post-retirement benefits. The corporation is generally the applicant, owner, and beneficiary of a policy insuring the life of a senior executive covered under the SERF. PPLI has not been used in COLI transactions featuring alternative investments as underlying fund option. Most COLI policies have been issued as registered variable universal life policies featuring registered funds (mutual fund) clones. VUL Policies. The introduction and distribution of Variable Universal Life insurance (VUL) increased dramatically over the last two decades, in the wake of the bu II market. Sales of VUL comprised 40 percent to 50 percent of life insurance company sales. VUL is a separate account product that offers multiple investment options in a manner similar to mutual funds. Assets of the separate account are not subject to the creditors of the insurer in the event of default. These assets are legally owned by the life insurer.

98 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 55 The investment performance of these investment funds is a direct passthrough to the policyholder and allows the policyholder to participate in various investment markets. However, the sophisticated investor is still limited to the investment selections of the insurer as well as the presence of high frontend sales loads. Targeting the High Net Worth Marketplace. The high net worth PPLI marketplace had its start in the offshore marketplace. Small offshore life insurers such as Isle of Man Assurance created customized VUL policies for wealthy American families in the early to mid-1990s. A number of onshore and offshore companies seemed to pursue the development and marketing of PPLI for the high net worth marketplace concurrently. Tremont, the former hedge fund consulting company, developed a Bermuda-domiciled carrier focused on providing a tax efficient solution for hedge fund investors. The Italian life insurer Generali also provided a U.S. tax-qualified PPLI solution from a Guernsey-domiciled life insurer in the timeframe. TIle earliest marketing and sales activity in the domestic high net worth PPLI marketplace that the author is able to document occulted around 1993 with CIGNA.14 John Hillman and John Fischer purchased a small Pennsylvania term insurer under rehabilitation in 1996 and converted the company, American Guardian Life (AGL), into a specialty life insurer focused on PPLI and PPVA. American General (a subsidiary of AIG) started ajoint venture with Templeton funds in 1998 and then bought out Templeton in Sun Life of Canada entered the marketplace along with New York Life in the early part of Some of the larger life insurers have exited the marketplace-sun Life, MassMutual, New York Life, and Nationwide. The two leading carriers in the domestic marketplace currently are Philadelphia Financial Life Assurance and American General. PPLI represents a small market for these very large carriers but requires a high degree of "touch" and service for a very demanding and well-advised clientele. The specialty life insurers that focus exclusively on high net worth private placement are designed to "manufacture" and service customized insurance contracts. PPLI policies were created with the following question in mind: How can a sophisticated high net worth investor combine the strong tax advantages 14 The prolific Philadelphia-based life insurance agent Alvin Block was the earliest and most significant PPLI producer in the high net worth marketplace. He motivated CrONA to offer the same product technology to his family office clients who invested in hedge funds. The author has spoken with Mr. Block numerous times over the years regarding (he private placement life insurance business and more specifically his involvement in the business. IS The author over the last decade has had personal relationships with the sen ior management of life insurers operating in the high net worth private placement insurance business.

99 56 JOURNAL OF TAXATION OF INVESTMENTS of life insurance with a life insurance product that offers customized investment options and is institutionally priced? As previously mentioned, the PPLI assets are not subject to the claims of the insurer's creditors in the event of the insurer's default. PPLI had initially been available in the corporate marketplace with very high minimum premiums, or alternatively in the offshore market with under-capitalized noninstitutional quality carriers. But the marketplace has changed in the last several years to make PPLI available at a lower premium threshold. Overview of Securities Law Authority for PPLI PPLI is a non-registered security for federal and state securities law purposes. The product is available to accredited investors and qualified purchasers as defined in federal securities law. The Securities Act of 1933 provides an exemption under Section 4(2) from securities registration for accredited investors as defined in Rule 501 (a) of Regulation D under the Securities Act." An accredited investor is defined as an investor with a net worth of at least $1 million and joint income of at least $300,000 in each of the last two years, with the likelihood of continuation in the current year.17 PPLI offerings are exempt from the Investment Company Act of 1940 under Section 3(c)(l) and 3(c)(7) offerings. Under Section 3(c)(l) the number of beneficial owners is limited to 99 investors." Investors must be accredited investors or qualified purchasers. A qualified purchaser has investable assets of at least $5 million. Under Section 3( c)(7) the number of beneficial owners is limited to 499 investors." The investors must be qualified purchasers. New SEC proposals would exclude the value of an investor's principal residence from investable assets.'" Overview of Tax Law Applicable to PPLI Definition of Life Insurance. The tax law definition of life insurance is found in Code Section Two different definitions of life insurance are provided and the policyholder must select the definition to be used at the time of the policy's issuance and maintain that definition throughout the policy's life. The cash value accumulation test tends to be used more in COLI transactions." This actuarial test provides for a lower initial death benefit " See 17 CFR See id. " Investment Company Act of (c)(I). " Investment Company Act of (c)(7). " SEC Release Nos ; IA 3341; IC 29891; File No. S " See IRC 7702(b).

100 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 57 relative to the initial premium, but has a larger net amount at risk in older ages near actuarial life expectancy (age 82). The net amount at risk is the difference between the policy's total death benefit and cash value. The net result is that the higher mortality cost in the older ages does not produce cash value accumulation as high as the second test-guideline premium test/cash value corridor. Most high net worth PPLI transactions use the guideline premium test, which also utilizes the cash value corridor requirement found in Section The guideline premium test using the cash value corridor provides the policy with better long-term cash accumulation. The cash value corridor reduces the amount of net amount at risk over the life of the policy. For example, at age 90, the policy no longer requires any risk transfer in excess of the policy cash value, i.e., the policy death benefit and cash value can remain equal. Modified Endowment Contract Rule. Section 7702A provides that a modified endowment contract (MEC) is a life insurance policy that is overfunded in the initial years of its existence based upon the timing and amount of premiums paid in relation to its death benefit. The MEC rules are essentially designed to discourage policy premium front-loading in the manner in which Congress believes too closely resembles the wayan investor would make his or her investment in an annuity product. The determination of whether a life insurance policy is an MEC is based on complex actuarial calculations and what is known as the "seven-pay" test. Generally, a policy is an MEC where, for example, the cumulative premiums paid at any time during the first seven years of the contract exceed the sum of the maximum net level premiums that could have been paid on or before such time, if the contract provided for paid-up future benefits after the payment of seven level annual premiums. Effectively, this test requires that the premiums paid into the policy be made over several years, as opposed to a single up-front payment. The seven-pay test, through complex actuarial assumptions and calculations, can be passed for a premium payment period of only four years. The following repercussions arise following characterization of a life insurance policy as an MEC: Loans taken from or secured by the policy are generally deemed to be distributions of earnings from the policy.23 All distributions, including payments upon the lapse or surrender of an MEC policy, are generally taxable as ordinary income up to the " See IRC 7702(c). 1l See IRC 72(e)(IO).

101 58 JOURNAL OF TAXATION OF INVESTMENTS amount by wruch the cash surrender value of the policy exceeds the cumulative amount of premiums paid into the policy." A 10 percent additional income tax is imposed on all distributions made prior to the insured attaining age 59\6- provided, however, that this penalty shall not apply where the insured is disabled, or where such distributions are part of a series of substantially equal periodic payments extending over the life of the taxpayer." Where an insurance policy is not characterized as an MEC, loans can generally be made from the policy on a "tax-free" basis. This result will ordinarily still be achieved in cases where the cumulative loans are in excess of the cumulative premiums paid into the policy The policy's cost basis is its cumulative premiums. Loans and partial surrender of the cash value are the primary mechanism whereby the policy owner is permitted to have access to a portion of the investment account during the insured's lifetime. As such, non-mec status is of critical importance in order to obtain the full benefits of this planning. Investment Diversification of Variable Insurance Policies. The taxation of variable insurance products is covered in Code Section 817(h). Treasury Regulations Section provides a detailed overview of the investment diversification requirements of variable insurance products. The regulations address a wide range of investment alternatives that are not found in retail variable life and annuity products such as direct investment in real estate and commodities." Section 817(h) provides that investment diversification is tested separately in each fund within the policy. No single investment may represent more than 55 percent of the fund; two investments, 70 percent; three investments, 80 percent; and four investments, 90 percent." Therefore, a fund must have at least five investments in order to meet the diversification requirements. The cliche "the devil is in the details" is a fitting statement to describe the application of the rules. Treasury Regulations Section provides detailed guidance on the investment diversification rules. The regulations interpret these rules for investment asset classes that are rarely seen in retail variable insurance products and only recently in private placement insurance 14 See id, " See IRC 72(v). (t). l6 See Gerald R. Nowotny, "Private Placement Group Variable Annuity Contracts- A Market Overview for Tax~Exemp t and Foreign Investors," 29(2} 1. Tax'n Invs. 49 (Wimer 2012). " See IRC 817(h) and Treas. Reg (b).

102 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 59 products for the high net worth marketplace. Partly this has to do with the limitations of each jurisdiction's life insurance non-forfeiture rules dealing with death benefit liquidity as well as the liquidity necessary for policy loans and policy surrender. As a result, most retail variable insurance products have registered funds that provide for daily liquidity and daily mark-to-market for investment fund net asset valuation purposes. The regulations provide that diversification is tested on the last day of each calendar quarter with a 30-day correction period in the event a fund does not meet the diversification requirements on the last day of each quarter." The regulations provide a one-year start-up period that begins the day a fund receives its initial funding." Real property accounts have a five-year period to meet the diversification requirements. 30 A fund that was previously diversified but for the appreciation or depreciation of securities within the portfolio continues to remain diversified." The regulations provide that all securities of the same issuer are treated as a single security for diversification purposes. All items of the same commodity are treated as a single security for diversification purposes. A portfolio of Treasury securities is considered to be automatically diversified." An important aspect of the investment diversification rules is the socalled "look-through" treatment of certain securities. The rules provide look-through treatment only to funds that are exclusively available through variable insurance company separate accounts. Revenue Rulings and were issued in response to a private letter ruling request by Keyport Life (now owned by Sun Life) regarding the look-through treatment of nonregistered partnerships." The prior regulation was interpreted to mean that an investment through the life insurer's separate account into a hedge fund (a non-registered partnership) would receive look-through treatment providing the ability to look through to the underlying securities of the fund. The Service ruled that these non-partnerships would no longer receive look-through treatment under Treasury Regulations Section (f)(ii) since the ability to invest in the fund was not exclusively available to policyholders of variable insurance products. These so-called "publicly available" securities would be treated as a single security for investment diversification testing purposes. 34,. See Treas. Reg (c). 19 See Treas. Reg (c)(2)(i). " SeeTreas. Reg (c)(2)(ii). " See Treas. Reg (d). " See Treas. Reg (b)(ii)(A), (B). JJ Rev. Ruls , CB 347; , CB 350.,.. See Treas. Reg (f)(3).

103 60 JOURNAL OFTAXATION OF INVESTMENTS The regulations look to the investment diversification rules under Section 85 I (b)(4) for registered investment companies as well. JS Investor Control Doctrine. In a life insurance or annuity contract, it is the policyholder (owner) that has the ability to control and manage the incidents of ownership associated with the policy. One of the incidents of ownership is the ability to control the investment decisions or fund selection within the policy. Two notions of investor control exist. The first notion is the subject of several rulings and cases dealing with "wrapping" publicly available investments. The Service has ruled a number of times regarding the ability of a policyholder to "wrap" investments that are "publicly available," i.e., not limited exclusively to life insurance company separate accounts," and it was ultimately decided in Christoffersen v. United States" that the taxpayer and not the insurance company should be taxed on the policy's underlying income. The second notion presents the more serious problem. It deals with the idea that a policyholder retains so much direct or indirect control over investments that the policyholder is deemed to be in constructive receipt of the underlying investments within the policy. As a consequence, the policyholder forfeits the substantial tax advantages of life insurance and annuities. Ultimately, this second notion of investor control requires a fact specific determination. Operational and Administrative Considerations. As previously stated, one of the principal advantages of PPLI and PPVA is the ability to customize investment options within the policy. How is this process accomplished? The life insurer performs an investment due diligence review of the proposed investment manager. Some life insurers outsource this task to consultants with special asset classes. This due diligence review will consider the personal and business background of the investment principals; investment track record; assets under management; and business history, as well as business model. Following the creation of an insurance dedicated fund (IDF) by the investment firm, the life insurer will sign a participation agreement to subscribe to the fund. The investment manager is responsible for certifying to the life insurer on a quarterly basis that it has met the investment diversification requirements of Section 817(h) and is in compliance with the investor control doctrine. The investment manager will nonnally report the net asset value " See Treas. Reg. J.817 5(t)(l). " See Rev. Ruls , CB 12; , CB 27; , CB 12; 82-54, CB 11. J7 749 F2d 513 (8th Cir 1984), cerro denied, 473 U.S. 905 (1985).

104 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 6t of the policyholder's investment on a monthly or quarterly basis depending upon the underlying investment strategy. The PPLI private placement memorandum (PPM) is like the U.S. Constitution-it is a living and breathing document. The PPM may be amended on an ongoing basis to add new investment options. These amendments normally do not require any advance filing with the department of insurance within the jurisdiction where the policy was issued or the insurer's domicile. u.s. vs. Offshore Insurance Domiciles Domestic PPLI. PPLI is available in both the domestic and offshore marketplaces. The decision of which offering to purchase is a function of the investor's personal tax planning needs. Generally, the domestic offering for a U.S. taxpayer provides coverage through an institutional-quality carrier with a long track record, independent third-party ratings, and extensive regulatory oversight by the various states and industry groups. The domestic carrier may be able to accommodate a much larger policy investment due to the greater availability of reinsurance. The only limiting factor is the availability of reinsurance. Currently, the reinsurance market has capped mortality risk at $65 million per policy. The availability of reinsurance is two to three times greater in the domestic market than in the offshore market. The policy must satisfy the tax definition of life insurance under Section 7702 in order to preserve the tax advantages for a U.S. taxpayer or resident alien. A trade-off in the domestic market is the imposition of a state premium tax. State premium taxes vary between I percent and 3 percent, depending upon the state. However, two states, Alaska and South Dakota, have instituted the lowest premium taxes (below 1 percent). The financial impact of the state premium tax within the product is approximately 15 to 20 basis points on the policy's internal rate of return over the long term. A federal tax known as the DAC (Deferred Acquisition Cost) is an additional cost within the product. This tax is amortized by the carrier through a 0.80 percent to 1 percent premium load within the product. The high net worth PPLI marketplace has undergone consolidation in the last two years. Large traditional life insurers such as Sun Life, New York Life, and Nationwide have exited the marketplace. PFLAC has recently acquired the private placement insurance business from The Hartford, giving PFLAC an additional $35 billion of assets under management in variable separate accounts. American General has operated successfully over the last 12 years. These offerings have minimized the importance of offshore domicile options. Additionally, Puerto Rico, a U.S. Commonwealth, has emerged as a new jurisdiction. As a Commonwealth, Puerto Rico is not subject to the compliance

105 62 JOURNAL OF TAXATION OF INVESTMENTS requirements of the Foreign Account Tax Compliance Act (FATCA).38 Policyholders are not subject to the Report of Foreign Bank and Financial Accounts (FBAR) requirements." Effectively, Puerto Rico is an "onshore offshore" jurisdiction. The Puerto Rican Congress approved legislation for international life insurers, e.g., life insurers issuing policies to non-puerto Rican life insurers. At the present time, two Puerto Rican specialty life insurers- Ashley Cooper Life International Insurer SPC and U.S. Commonwealth Life Insurance Company-issue private placement insurance contracts. The companies were formed in response to the increased scrutiny and regulation of transactions in offshore jurisdictions. Offshore PPLI. The asset protection opportunities available in certain taxhaven jurisdictions may point an investor toward an offshore purchase. A combination of asset protection planning and the policy's exempt status under the rules of the foreign jurisdiction make it a good choice. Generally, most offshore life insurance jurisdictions have adopted separate account legislation that exempts the separate account assets from the claims of the insurer's creditors. These rules parallel the separate account treatment found in domestic offerings. The policy is also exempt from the claims of the policyholder's creditors. Tax haven jurisdictions have adopted sophisticated trust legislation to protect the assets of a trust. The Cook Islands and Nevis are two wellknown jurisdictions with favorable treatment of trusts from an asset protection standpoint. The Cook Islands has abolished the Statute of Elizabeth, which recognizes judgments from a jurisdiction forcing creditors to bring a new legal action. The Cook Islands also has a short statute of limitations-two years." From an insurance standpoint, the difference in the insurance regulatory environment provides the opportunity to offer offshore PPLI with investment options that are less liquid. Investment options within a domestic VUL, for example, may be restricted to the extent that they provide little investment liquidity. Offshore PPLI may provide access to non-sec-approved offshore investments that are unavailable in the United States. All U.S. states have adopted nonforfeiture laws, which require paying the policyholder in cash within six months from the time of notification for policy loan or surrenders. Similarly, most U.S. states have adopted statutes with respect to the timeliness of the death benefit payment. Generally, a death benefit payment made after a 30-day period carries an interest penalty, which can be as high as 12 percent in some domestic 38 Subtitle A of Title V of Hiring Incentives to Restore Employment Act, P.L (2010) (codified at IRC ). " 31 CFR Part Cook Islands International Trust Act of Nevis has very similar legislation; it has also abolished the Statue of Elizabeth and has a two-year statute of limitations. Similarly. it has a "beyond a reasonable doubt" standard as the burden of proof for fraudu lent conveyance.

106 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 63 jurisdictions. While many states would allow, by means of a policy endorsement, an in-kind death benefit of the limited partner interest, Revenue Rulings and have placed in question the ability to use this endorsement from the standpoint of the investor control doctrine." While an offshore insurance regulator would allow for much greater flexibility in this area, the in-kind benefit is still subject to the same federal tax considerations regarding the investor control doctrine. As a result, both domestic and offshore life insurers have opted for a deferred payment endorsement. Depending upon the jurisdiction, a life insurer may have the ability to delay payment from six months up to an indefinite amount of time. Offshore PPLI may allow investment options such as private placement offerings for venture capital, private equity, and leveraged buyout which tend to have longer "lock up" periods. Domestic carriers will frequently only allow a lock up and payment deferrals of up to one year. These investment offerings are generally highly illiquid. Many states have approved carrier endorsements for deferred payment on policy benefits. The offshore PPLI acquisition may also confer a cost savings through avoidance of a state premium tax. Avoidance of the state premium tax may confer a basis point advantage on the return over the long-term. Generally, a person seeking life insurance who is a U.S. taxpayer or who wants to name beneficiaries who are U.S. taxpayers should purchase a policy that is compliant with Section 7702 through an insurer which has made a Section 953(d) election." The Section 953(d) election is a corporate election that allows the insurer to be treated as a U.S. taxpayer; this removes the risk of the carrier being "dragged" onshore as a U.S trade or business because it is insuring U.S. lives. (If such dragging were to happen, the risk to the policyholder is that the policy would need to be repriced for U.S. corporate taxes, which would have a devastating impact on the policyholder. As a result, a U.S taxpayer should purchase a policy from an insurer that has made this election.) A U.S. non-resident alien may also purchase PPLI from an offshore carrier. For such a non-resident, the policy need not be U.S. tax compliant. As a result, the policy can maintain a minimal ratio of death benefit-to-cash value. Generally, European-styled unit-linked policies have a death benefit which is 10 I percent to 110 percent of the cash value. Most jurisdictions around the world confer tax-advantaged treatment to life insurance, and many countries are adopting the concept of worldwide taxation. These policies do not require a carrier which has made the Section 953( d) election. The Section 953(d) election is still important for a non-resident alien who purchases a policy that has U.S. investments which generate investment 41 See supra note 33; notes and accompanying text... See IRe 953(d).

107 64 JOURNAL OF TAXATION OF INVESTMENTS income subject to the 30 percent withholding tax on fixed and determinable periodic income under Section 871(a)Y Section 1445 can create a withholding tax for investment in U.S. real estate and Section 871(b)(2) for effectively connected income (ECI) to au.s. trade or business in the event the life insurer has not made a Section 953(d) election." Due to the small number of reinsurers operating in the offshore high net worth PPLI marketplace, the availability of reinsurance for large premium investments is roughly two to three times greater in the domestic market. While it is widely believed that that the pricing of offshore policies is more competitive than that for domestic policies, this claim may not he true. The offshore markets have few carriers in general and even fewer institutional quality carriers. The competition among institutional-quality carriers is not as great as in the domestic marketplace. Bermuda and the Cayman Islands are the primary offshore jurisdiction for offshore insurers. Both have a long, stable history politically and economically. In choosing an offshore situs, political and economic stability are critical factors. Tax Advantaged Wealth Accumulation Using PPLI A sophisticated investor can use PPLI to enhance the after-tax accumulation of tax-inefficient investments by redeploying these investments (such as hedge funds) in a manner that promotes a significantly higher net aftertax return. Private placement insurance products are ideally suited to accomplishing this planning objective. The policy has no surrender charges, and the sales loads and front-end policy administrative expenses are minimal. As a result, the cash value immediately exceeds the initial premium absent negative investment performance. In typical high net worth PPLI transactions, policies are designed to provide the least amount of insurance death benefit necessary in order to comply with the requirements of the Internal Revenue Code definition of life insurance while providing a minimal increase in the actual death benefit in excess of the cash value account accumulation. How It Works. Table I depicts an example of such a policy design and affords a simple contrast to that of a typical taxable investment in a hedge fund. In this example, the insured is a 50-year-old male who is a preferred non-smoker for medical underwriting purposes. He has $10 million in a hedge fund earning 15 percent per year after management fees. For this example, his marginal tax rate is assumed to be 47 percent (federal, state, and local). " See IRC 871(0)... See IRC 1445, 871(b)(2).

108 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 65 Table 1: Hypothetical $10 Million PPLI Policy Designed for a 50-Year-Old Male Year Policy NetTaxable End oiyear NetTaxable Cash Death Investmenl Policy Cash Dealh Inveslmenl VaJue Benefit Value ($) Value ($) Benefit ($) IRR ('!o) JRR ('!o) JRR ('!o) 1 10,795,000 11,362,510 35,943, , ,653,203 12,912,620 35,943, ,579,632 14,684,290 35,943, ,579,713 16,710,230 35,943, ,69 37, ,859,300 19,019,330 35,943, ,489,508 36,525,140 48,943, , ,502, ,617,360 86,153, , ,179, ,575, ,427, ,238, ,828, ,11 9, ,258,263 2,004,725,000 2,104,961, The policy is an MEC, which uses the guideline premium/cash value corridor definition of life insurance. The death benefit option is the increasing death benefit option (Option B) which includes the initial death benefit plus the accumulated cash value. This investment is compared to a similar deposit into a hypothetical hedge fund life insurance policy. As Table I indicates, the cost of the taxadvantaged hedge fund is substantially lower than the cost of paying income taxes. The illustrated results project a total cost of 138 basis points in the early years dropping to approximately 80 basis points over time as the "price tag" to avoid income tax. (Among items that may affect this illustration with a "real" client are the actual age and health of the insured, hi s or her actual marginal tax rate, and the actual performance of the hedge fund.) At the death of the insured, the insurer will payout the policy death benefit (which includes the value of the separately managed hedge fund account) to the beneficiary designated by the owner of the policy income-taxfree. During the life of the insured, the policy can be cashed in for an amount equal to the value of the separately managed account without the imposition of surrender charges (which would normally apply in a traditional life insurance policy), or the owner of the policy may access cash value via the use of loans taken against the policy. CostIBenefit Analysis. The cash value of the life insurance policy is increased by the investment performance and yields on the variable subaccount (again, a hedge fund in our example), without any erosion for

109 66 JOURNAL OF TAXATION OF INVESTMENTS income taxes. The cost of setting up this type of policy (including issuance costs, servicing fees, etc.) will generally be significantly less than the first year's income tax savings on the hedge fund returns. Annual charges including the cost of the insurance protection will be between 50 and 150 basis points. In return for the policy owner's willingness to assume these costs, the policy owner and the beneficiary (or beneficiaries, should more than one be named) will not be subject to current taxation of the inside build-up of the policy cash value (the separately managed investment fund value and accumulated earnings). Moreover, if the policy is maintained until the death of the insured, the entire death benefit will be received by the beneficiary free of all U.S. income taxes, including all of the earnings from the hedge fund investments from inception of the policy. If estate tax minimization is a planning consideration, the policy's ownership should be structured in a manner so that the policyholder does not retain any incidents of ownership over the policy under Section If the ownership of the policy is properly structured and the insured has no incidents of ownership over it, the policy death benefit will be exempt from federal estate taxes. The net benefit of sheltering the investment income and accumulations from income and estate tax is the equivalent of a 400+ percent incremental rate of return (in any given year) on investment vis-a-vis the ownership of income and estate taxable hedge fund investments. The compounding effect of this incremental advantage produces much larger advantages over time. Planning Considerations. As a part of the estate planning process, PPLI offering policy investment options may prove to be the appropriate solution to help meet a variety of objectives. The expiration of the Bush tax cuts will have a deleterious effect on family wealth. The top marginal estate tax rate is scheduled to return to 55 percent. The exemption equivalent will drop from $5 million to $1 million per taxpayer. Clearly, for wealthy individuals, the issue of funding the payment of the federal estate tax will become extremely important once again. Ultimately, investment performance is Ihe biggest factor in life insurance product performance. The difference in policy costs and reinsurance costs between carriers is not significantly different. Long-term investment performance can easily overcome the differential between these costs. Family offices and multifamily offices need the ability to include alternative investments within the fund selection of a life insurance policy. These wealthy families also prefer institutional pricing. For wealthy individual investors who currently have traditional cash value life insurance policies, the possibility of securing a more aggressive investment alternative and a lower cost structure for their life insurance is

110 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 67 available These existing policies may be exchanged for new policies without the imposition of income tax on the accumulated earnings within the policy. The Code enables owners of such policies with the opportunity to exchange them for new policies on an income-tax-free basis. Section 1035 provides that an existing insurance policy may be exchanged for a new insurance policy on the same insured providing all of the federal and state formalities attendant to the exchange are completed between the insurance companies involved with the exchange. These rules enable the exchange to occur with no cash coming into the hands of the policy owner at any time during the process. For example, it may therefore be possible for the wealthy investor with significant existing cash value life insurance that is owned in an irrevocable life insurance trust to seek the cooperation of the trustees of that trust in converting the existing policies into insurance policies that will provide enhanced benefits to family members. It is important to note that these trusts may be useful in providing the beneficiaries with income and support benefits during the life of the insured patriarch or matriarch. However, the insured is subject to medical underwriting requirements. The existing policy should not be exchanged until the new insurance offer is in place. One of the failures of traditional life insurance trust planning is that there is generally limited availability of funds to provide lifetime benefits because of the cost structure and investment performance. It is not uncommon for grantors/insureds under such trusts to complain that there are no benefits available for their children "until I die." PPLI, with its potentially superior investment performance and lower cost structure, is uniquely suited to meet the income needs of such grantors as it enables more aggressive investments that may increase cash accumulations, which can be accessed as policy loans during their lifetime without compromising the integrity of the death benefits that the policy is designed to produce. Tax Advantaged Wealth Accumulation Using PPVA Product Basics. PPVA policies have no surrender charges and, like PPLI, the investment options may include sophisticated investment options such as hedge funds. The typical retail variable annuity pays the agent a commission equal to 4 percent to 6 percent of premiums paid into the policy, and has declining surrender charges over five to eight years. The contract additionally pays the agent, through the agent's broker-dealer, an asset-based charge of 25 to 35 basis points. Retail variable annuity contracts typically provide the policyholder with a wide range of mutual fund subaccounts. PPVA contracts have customized and negotiated sales loads that generally are equal to 1 percent to 2 percent of each premium deposited into the contract. These sales loads are much lower than those for retail variable annuity contracts.

111 68 JOURNAL OF TAXATION OF INVESTMENTS The taxation of annuity contracts is governed by Section 72. PPVA contracts are also subject to the same investment diversification and investor control considerations as PPLI under Section 817(h) and Treasury Regulations Section PPVA provides for tax deferral. The retail variable insurance market offers immediate variable annuities, which provide for annuity payments to the annuitant within a year of the premium payment. Rather than provide a "fixed" payment, variable immediate annuities provide for payments that increase or decrease based upon the investment performance of the underlying investment(s) within the contract. The policyholder is able to make an election to determine fund selection. These contracts are not yet available with the high net worth PPVA marketplace. Generally, wealthy individuals have other sources of income and use insurance products for tax-advantaged accumulation rather than income planning. The retail variable marketplace has evolved with a number of interesting product developments and features. Other features found in retail variable insurance products that are not found in PPVA products include the Guaranteed Minimum Death Benefit Rider and the Guaranteed Minimum Income Benefit Rider. These riders provide a guaranteed income at age 65 regardless of the underlying investment performance of separate account investments. Similarly, the policy also provides for a guaranteed accumulation payable at the death of the policyholder. These contracts come at a price. It is not uncommon for a life insurer in the current market to offer a 5 percent guaranteed return while charging 4 percent (including the policy 's mortality and charge expense). CostIBenefit Analysis. It is not clear when and why variable deferred annuities garnered such a bad reputation among the financial press. When did tax deferral become such a bad thing? Most likely it is due to the product pricing and sales loads. PPVA contracts maximize the benefits of tax deferral with institutional pricing and sales loads. The investment flexibility and range of investment possibilities make PPVA contracts an ideal vehicle for registered investment advisors to utilize as part of the investment planning process. High net worth investors should consider a tax-free exchange (under Section 1035) from a retail variable annuity to a PPVA contract. The contract is ideally suited for managing asset classes that generate ordinary income such as interest, dividends, and short-term capital gains. The sophisticated planning opportunities are not lost on ultra-high net worth individuals who may be heavily invested in tax-inefficient hedge fund strategies. Additionally, families with multigenerational wealth may already have significant investment assets managed outside the taxable estate in trusts. If these assets are held in grantor trusts, the income will be taxed to the settlor

112 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 69 for income tax purposes." Non-grantor trusts are separate taxpayers. The top marginal tax bracket for trusts is reached with only $11,200 of income." Planning Example: Dynamic Annuity. Trustees can use PPVA contracts to perpetuate a family dynasty on a tax-deferred basis using PPVA contracts-a so-called dynasty annuity. The non-natural person rule of Section 72(u) provides that deferred annuities lose the benefit of tax deferral when the annuity owner is a non-natural person, but the legislative history of Sections 72(u) and 72(u)(l)(B) provides an exception for annuities that are "nominally owned by a non-natural person but beneficially owned by an individual."47 This exception describes the typical arrangement in a personal trust. The IRS has reviewed this issue with respect to trusts at least eight times in private letter rulings and has ruled favorably for the benefit of the taxpayer in each instance. 48 Section 72(s)(6) deals with the distribution requirements of an annuity owned by a non-natural person (e.g., a trust). It provides that the death of the primary annuitant is the triggering event for required distributions from the annuity contract." The primary annuitant must be an individual. Distributions must begin within five years following the death of the primary annuitant for the trust-owned annuity. At death, the annuity account balance may be paid out over the life expectancy of the beneficiary, providing additional deferral." The dynasty annuity involves the purchase of a PPVA contract by the trustee of the family trust. The trustee selects young annuitants (grandchildren or great grandchildren) as the measuring lives of the annuity in order to maximize tax deferral within the PPVA contract. This structure maximizes tax deferral over the lifetime of the PPVA's young annuitant. In the case of a three-year-old grandchild, tax deferral could be accomplished for more than 80 years before a distribution is required. The transaction can be summarized as follows: Purchase of a PPVA contract: The trustee of the family dynasty trust is the applicant. owner, and beneficiary of the PPVA contract(s). 4S See tre forthe different grantor trust rules. " Sec IRe 641. " See IRe 72(u)(I)(B)... See, e.g. PLRs (May ); (Nov. 5, 1998); (June 24, 1996); (Oct. 24, 1991): (Dec. 5, 1989). " See IRe 72(s)(6)(A). so See tre 72(s)(2)(C).

113 70 JOURNAL OF TAXATION OF INVESTMENTS Selection of young annuitants: The critical element in the maximization of tax deferral is the selection for each separate PPYA contract of a young annuitant(s) with the greatest potential of living to normal life expectancy. The trustee may purchase multiple policies with different individual annuitants to "hedge" against the possibility of exposing the trust to a tax burden as a result of distribution requirement caused by the pre-mature death of an annuitant. All of the investment income and gains from the PPYA will accrue within the contract on a tax-deferred basis. Prior to the annuitant's death, the trustee may request a distribution from the life insurer in order to make a distribution to a trust beneficiary. At the death of the annuitant, the trustee will be required to make a distribution of the annuity based upon the life expectancy of trust beneficiaries over the life expectancy of trust beneficiaries (presumably the surviving children). The approximate cost of the PPYA contract is 40 basis points per year. The PPYA contract has the flexibility to add investment options to the contract. The customized account provides an open architecture allowing the investment advisor to manage based upon its asset allocation model and changes to the model. A $10 million single premium invested into a PPYA contract eaming 8 percent per year over an 80-year period, e.g., would grow to $2.5 billion in the eightieth year. This small example illustrates the power of tax deferral compounding over a long time period. Frozen Cash Value Policies Product Basics. Restricted cash value private placement life insurance, also known as frozen cash value life insurance (FCY), is best known as a flexible premium variable adjustable (universal) life insurance policy that is issued by offshore life insurance companies domiciled in tax-haven jurisdictions such as Bermuda or the Cayman Islands. Also, as noted earlier, Puerto Rican companies are entering the market. One new specialty life insurer there now offers both traditional PPLI and FCY policies. The possibilities and benefits of a life insurance policy with a restricted cash value were originally described in the October 1994 issue of Offshore Investment.'! The policy is intentionally designed to violate Section 7702, Sl Craig Hampton, "The HamplOn Freeze-International Life Insurance Planning at its Best," Offshore lov. (Oct. 1994), available at hltp:/iwww.offshoreinvestmenlcom/pages/ index.asp?title=offshore_investmenc ~ _Login&ID= 1592&issueID=9806. His later update, similarly titled and published in Oct. 1995, is available at pages/index.asp?title~offshore_lnvestment_-_login&id~ 1464&issueJD~9806.

114 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 71 the tax law definition of life insurance. The other legal considerations are imposed under the insurance laws of the jurisdiction where the coverage is issued. Generally speaking, all of the carriers issue the coverage as variable life insurance. In most cases, the policy is issued by non-section 953(d) electing carriers. Under most FeV contracts, the death benefit is equal to the sum of the guaranteed specified amount of death benefit plus the cash value on the claim date plus the policy's mortality reserve value on that date. This amount is essentially the cumulative premiums plus or minus investment experience along with a death benefit corridor, which most carriers express as a fixed percentage between percent and 110 percent. Some insurers issue policies with a fixed amount of coverage-$l million above the initial premium and mortality reserve. The cash value under most FeV policies is defined as the fair market value of all assets constituting the policy fund, less any policy loans and any accrued unpaid fees or expenses due under the terms of the policy. The cash surrender value of the policy is the lesser of the cash value or the sum of all premiums paid under the policy, computed without regard to any surrender charges, and policy loans, under the terms of the policy. CostIBenefit Analysis. Fey policies do not provide for or guarantee any minimum cash value. The cash value increases or decreases depending upon the investment experience of the policy fund. The insurer holds the appreciation of the assets (in excess of the amount of cumulative premiums) in the separate account as a mortality reserve solely for the purposes of funding the payment of the death benefit payable under the FeV policy. Under most FeV contracts, the policyholder may take a tax-free partial surrender of the policy cash value up to the amount of cumulative premiums within the policy. The policyholder may also take a policy loan up to 90 percent of the policy's cumulative premiums. Loan terms vary from company to company. The significance of a partial surrender versus a policy loan is that the partial surrender will not leave the policy with a liability. The surrender and loan proceeds are tax-free under any circumstance, therefore the policyholder has access to policy assets on a tax-free basis. Tax Law Analysis. For a U.S. taxpayer, the FeV policy is taxed under Section 7702(g). Technically, the taxation of the defective life insurance policy would result in the taxation of the policy's inside build-up as well as the mortality cost based upon the policy's net amount at risk. The net amount at risk is the difference between the policy death benefit and cash value. However, because the Fey contract defines the cash value as cumulative premiums, there is never any inside build-up under the contract. The net

115 72 JOURNAL OF TAXATION OF INVESTMENTS amount at risk is limited to a fixed amount or percentage. Section 7702(g) provides that the death benefit is income tax-free under Section 10 1 (a).52 A strong technical argument (although not supported by any existing rulings) can be made that the investor control doctrine is not applicable to FCY contracts. First, the contract is intentionally noncompliant with Section Second, it is designed so that there is no inside build-up of the cash value as defined within the policy form during the lifetime of the insured. Finally, because the policyholder is unable to access any benefits under the contract other than a portion of his cumulative premiums until death, there is a strong argument against any constructive receipt or control of investments within the policy. Planning Considerations. FCY contracts are an excellent planning tool in certain situations. Large investment deposits into a traditional PPLI contract may not be possible due to the limitations of the life reinsurance market. The FCY contract provides better tax results than a PPYA contract during lifetime or at death. The single premium deposit is not subject to the MEC rules of Section 7702(a). The inside gain due to investment performance is not accessible during lifetime, but a substantial portion of the initial premium (90 percent) may be borrowed by the policyholder income-tax free. Unlike a deferred annuity contract, which mandates taxable distributions at death under Section 72(s), the FCY contract provides for the payment of an income-tax-free death benefit at death. Also, the FCY contract is not subject to the non-natural person rules of Section 72(u); therefore the FCY contract may be considered in circumstances where an annuity would have been used but for the non-natural person rules. The FCY contract might also be used in corporate-owned life insurance for funding SERPs and post-retirement benefit programs. The reduced death benefit corridor on the FCY contract due to the fact that it does not need to comply with the cash value corridor requirements of Section 7702 could reduce mortality charges within the contract substantially, as much as 40 to 50 basis points. The compounding effect of these savings within the contract over a long period can enhance accumulation significantly. Example of an FCV Contract. Table 2 illustrates the operation of an FCY contract for a client who is 62 years old when the policy is issued. The initial premium is $10 million, and the investment return assumption is 12 percent (net in all years). The FCY contract is designed with a death benefit corridor of 105 percent of the initial premium. The long-term fractional reduction in the investment return is only 25 basis points. The death benefit is paid to the beneficiaries on a tax-free basis. " See IRe 7702(g)(2).

116 USING PRIVATE PLACEMENT INSURANCE PRODUCTS 73 Table 2: Hypothetical $10 Million FCV Policy Designed for a 52-Year-Old Male Net Taxable End 01 Year NelTaxable Dealh Year Inveslmenl Policy Cash Dealh Inveslmenl BenefitlRR ($) Value ($) Value Benefit ($) (%) IRR (%) 1 10,564,000 10,000,000 11,167, ,489,508 10,000,000 30,284, ,502,114 10,000,000 52,810, ,179,894 10,000,000 92,155, ,238,319 10,000, ,081, Conclusion Private placement insurance contracts are unique investment vehicles that are grossly under-utilized by professional advisors. These institutionally priced variable insurance contracts allow for investment customization and provide for the possibility of stronger and more consistent investment performance. The tax advantages of life insurance and deferred annuities are well known, but not on thi s institutional platform. The cost of the insurance contract presents very little "drag" on investment performance. Ultimately, it is strength and consistentency that are the biggest catalysts in investment performance. As outlined herein, there are several options within the realm of private placement insurance. Life insurance agents have not been and will not be the catalyst of the sector's growth due to a fundamental conflict of interest-their large commissions. Thus, it is up to professional advisors-lawyers, accountants, trust officers, and private bankers-to bring the planning possibilities to the attention of their clients. The long-term results can be stunning, providing families with generations of tax-advantaged wealth accumulation. The thought of what lies ahead from a tax perspective for high net worth investors is daunting, to say the least. There is a very high likelihood we will see combined marginal federal and state income tax rates in excess of 50 percent, along with the return of higher federal estate tax rates and a reduction of available income tax deductions. High net worth investors will need to rely on their advisors to steer them to viable tax structures with an underpinning of strong statutory authority. The life insurance industry has managed to preserve the favorable taxation of life insurance and annuities. Tax professionals should not let their clients miss out on a good planning opportunity.

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118 Section 7702 (a) General rule For purposes of this title, the term life insurance contract means any contract which is a life insurance contract under the applicable law, but only if such contract - (1) meets the cash value accumulation test of subsection (b), or (2) (A) meets the guideline premium requirements of subsection (c), and (B) falls within the cash value corridor of subsection (d). (b) Cash value accumulation test for subsection (a)(1) (1) In general A contract meets the cash value accumulation test of this subsection if, by the terms of the contract, the cash surrender value of such contract may not at any time exceed the net single premium which would have to be paid at such time to fund future benefits under the contract. (2) Rules for applying paragraph (1) Determinations under paragraph (1) shall be made - (A) on the basis of interest at the greater of an annual effective rate of 4 percent or the rate or rates guaranteed on issuance of the contract, (B) on the basis of the rules of subparagraph (B)(i) (and, in the case of qualified additional benefits, subparagraph (B)(ii)) of subsection (c)(3), and (C) by taking into account under subparagraphs (A) and (D) of subsection (e)(1) only current and future death benefits and qualified additional benefits. (c) Guideline premium requirements For purposes of this section - (1) In general A contract meets the guideline premium requirements of this subsection if the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time. (2) Guideline premium limitation The term guideline premium limitation means, as of any date, the greater of - (A) the guideline single premium, or (B) the sum of the guideline level premiums to such date. (3) Guideline single premium

119 (A) In general The term guideline single premium means the premium at issue with respect to future benefits under the contract. (B) Basis on which determination is made The determination under subparagraph (A) shall be based on - (i) reasonable mortality charges which meet the requirements (if any) prescribed in regulations and which (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners standard tables (as defined in section 807(d)(5)) as of the time the contract is issued, (ii) any reasonable charges (other than mortality charges) which (on the basis of the company s experience, if any, with respect to similar contracts) are reasonably expected to be actually paid, and (iii) interest at the greater of an annual effective rate of 6 percent or the rate or rates guaranteed on issuance of the contract. (C) When determination made Except as provided in subsection (f)(7), the determination under subparagraph (A) shall be made as of the time the contract is issued. (D) Special rules for subparagraph (B)(ii) (i) Charges not specified in the contract If any charge is not specified in the contract, the amount taken into account under subparagraph (B)(ii) for such charge shall be zero. (ii) New companies, etc. If any company does not have adequate experience for purposes of the determination under subparagraph (B)(ii), to the extent provided in regulations, such determination shall be made on the basis of the industry-wide experience. (4) Guideline level premium The term guideline level premium means the level annual amount, payable over a period not ending before the insured attains age 95, computed on the same basis as the guideline single premium, except that paragraph (3)(B)(iii) shall be applied by substituting 4 percent for 6 percent. (d) Cash value corridor for purposes of subsection (a)(2)(b) For purposes of this section - (1) In general A contract falls within the cash value corridor of this subsection if the death benefit under the contract at any time is not less than the applicable percentage of the cash surrender value. (2) Applicable percentage In the case of an insured with an attained age as of the beginning of the contract year of: More than: But not more than: The applicable percentage shall decrease by a ratable portion for each full year: From: To:

120 In the case of an insured with an attained age as of the beginning of the contract year of: More than: But not more than: The applicable percentage shall decrease by a ratable portion for each full year:

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148 Insurable interest; personal insurance. (1) Any individual of legal capacity may procure or effect an insurance contract on his or her own life or body for the benefit of any person, but no person shall procure or cause to be procured or effected an insurance contract on the life or body of another individual unless the benefits under such contract are payable to the individual insured or his or her personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured. The insurable interest need not exist after the inception date of coverage under the contract. (2) For purposes of this section, the term: (a) Business entity includes, but is not limited to, a joint venture, partnership, corporation, limited liability company, and business trust. (b) Insurable interest as to life, health, or disability insurance includes only the following interests: 1. An individual has an insurable interest in his or her own life, body, and health. 2. An individual has an insurable interest in the life, body, and health of another person to whom the individual is closely related by blood or by law and in whom the individual has a substantial interest engendered by love and affection. 3. An individual has an insurable interest in the life, body, and health of another person if such individual has an expectation of a substantial pecuniary advantage through the continued life, health, and safety of that other person and consequent substantial pecuniary loss by reason of the death, injury, or disability of that other person. 4. An individual party to a contract for the purchase or sale of an interest in any business entity has an insurable interest in the life of each other party to such contract for the purpose of such contract only. 5. A trust, or the trustee of a trust, has an insurable interest in the life of an individual insured under a life insurance policy owned by the trust, or the trustee of the trust acting in a fiduciary capacity, if the insured is the grantor of the trust; an individual closely related by blood or law to the grantor; or an individual in whom the grantor otherwise has an insurable interest if, in each of the situations described in subsection (5), the life insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured. 6. A guardian, trustee, or other fiduciary, acting in a fiduciary capacity, has an insurable interest in the life of any person for whose benefit the fiduciary holds property, and in the life of any other individual in whose life the person has an insurable interest so long as the life insurance proceeds are primarily for the benefit of persons having an insurable interest in the life of the insured. 7. A charitable organization meeting the requirements of s. 501(c)(3) of the United States Internal Revenue Code, as amended, has an insurable interest in the life of any person who consents in writing to the organization s ownership or purchase of that insurance. 8. A trustee, sponsor, or custodian of assets held in any plan governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. ss et seq., or in any other retirement or employee benefit plan, has an insurable interest in the life of any participant in the plan with the written consent of the prospective insured. An Page 1 of 2

149 employer, trustee, sponsor, or custodian may not retaliate or take adverse action against any participant who does not consent to the issuance of insurance on the participant s life. 9. A business entity has an insurable interest in the life, body, and health of any of the owners, directors, officers, partners, and managers of the business entity or any affiliate or subsidiary of the business entity, or key employees or key persons of the business entity or affiliate or subsidiary, if consent is obtained in writing from the key employees or persons before the insurance is purchased. The business entity or affiliate or subsidiary may not retaliate or take adverse action against any key employee or person who does not consent to the issuance of insurance on the key employee or key person s life. For purposes of this subsection, a key employee or key person means an individual whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code of (3) An insurer shall be entitled to rely upon all statements, declarations, and representations made by an applicant for insurance relative to the insurable interest which such applicant has in the insured; and no insurer shall incur any legal liability except as set forth in the policy, by virtue of any untrue statements, declarations, or representations so relied upon in good faith by the insurer. (4) If the beneficiary, assignee, or other payee under any insurance contract procured by a person not having an insurable interest in the insured at the time such contract was made receives from the insurer any benefits thereunder by reason of the death, injury, or disability of the insured, the insured or his or her personal representative or other lawfully acting agent may maintain an action to recover such benefits from the person receiving them. (5) A contract of insurance upon a person, other than a policy of group life insurance or group or blanket accident, health, or disability insurance, may not be effectuated unless, on or before the time of entering into such contract, the person insured, having legal capacity to contract, applies for or consents in writing to the contract and its terms, except that any person having an insurable interest in the life of a minor younger than 15 years of age or any person upon whom a minor younger than 15 years of age is dependent for support and maintenance may effectuate a policy of insurance on the minor. (6) For purposes of this section, the signature of the proposed insured, having capacity to contract, on the application for insurance shall constitute his or her written consent. (7) This section does not apply to any policy of life insurance to which s (8) applies. History. s. 453, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 377, 809(2nd), ch ; s. 79, ch ; s. 13, ch ; s. 114, ch ; s. 1, ch Page 2 of 2

150 The 2013 Florida Statutes CHAPTER 627 INSURANCE RATES AND CONTRACTS PART V GROUP LIFE INSURANCE POLICIES Group contracts and plans of self-insurance must meet group requirements Out-of-state groups Employee groups Debtor groups Labor union groups Trustee groups Credit union groups Additional groups Group life insurance; association groups Group life insurance for dependents Provisions required in group contracts Grace period Incontestability Application; statements deemed representations Insurability Misstatement of age Payment of benefits Certificate Conversion on termination of eligibility Conversion on termination of policy Death pending conversion Continuance of coverage during disability Waiver of premium for disabled insured Use of dividends, refunds, rate reductions, commissions, service fees Premium rates Assignment of incidents of ownership in group life insurance policies, including conversion privileges Notification to insureds of cancellation or expiration Replacement or termination of group life insurance; liability of prior insurer Liability of succeeding insurer on replacement of group policy Extension of benefits Group contracts and plans of self-insurance must meet group requirements. (1)(a) A life insurance policy insuring the lives of more than one individual may be delivered or issued for delivery in this state only if the policy is issued to one of the groups specified in ss , and only if the policy complies with the other applicable provisions of this part. (b) A plan of self-insurance providing benefits in the event of death to residents of this state may be established or maintained only if the plan complies with the applicable provisions of this part relating to the rights of individuals to specified benefits and coverages. (2) Subsection (1) does not apply to life insurance policies or plans of self-insurance: (a) Insuring or providing benefits only to individuals related by blood, marriage, or legal adoption. (b) Insuring or providing benefits only to individuals who have a common interest through ownership of a business enterprise, or a substantial legal interest or equity therein, and who are actively engaged in the management of the business enterprise. (c) Insuring or providing benefits only to individuals otherwise having an insurable interest in each other s lives. 1 (d) Insuring or providing benefits pursuant to s (2)(b)8. or 9. (3) As used in this part: (a) Policy, insurance policy, and group life insurance policy include plans of self-insurance providing death benefits. (b) Amount of insurance and insurance include the death benefits provided under a plan of self-insurance. (c) Insurer includes any person or governmental unit providing a plan of self-insurance. (4) A nongovernmental self-insurance plan providing life insurance may not be contributory by participants. (5) This section does not apply to any plan which is established or maintained by an individual employer in accordance with the Employee Retirement Income Security Act of This subsection does not allow an authorized insurer to issue a group life insurance policy or certificate which does not comply with this part. Page 1 of 10

151 History. s. 524, ch ; s. 3, ch ; s. 1, ch ; ss. 3, 10, ch ; ss. 2, 3, ch ; ss. 421, 448, 809(2nd), ch ; ss. 55, 79, ch ; s. 5, ch ; s. 16, ch ; ss. 46, 114, ch ; s. 10, ch Note. Section 12, ch , provides in part that [e]ffective [June 30, 2008,] the Department of Financial Services may adopt rules to implement this act Out-of-state groups. (1) Any group life insurance policy issued or delivered outside this state under which a resident of this state is provided coverage shall comply with the provisions of this part in the same manner as group life policies issued in this state. (2) This part does not apply to a group life insurance policy issued or delivered outside this state under which a resident of this state is provided coverage if: (a) The policy is issued to an employee group the composition of which is substantially as described in s ; a labor union group the composition of which is substantially as described in s ; a trustee group the composition of which is substantially as described in s ; a credit union group the composition of which is substantially as described in s ; an additional group complying with s ; an association group the composition of which is substantially as described in s ; an association group to cover persons associated in any other common group, which common group is formed primarily for purposes other than providing insurance; a group which is established primarily for the purpose of providing group insurance, provided the benefits are reasonable in relation to the premiums charged thereunder and issuance of the group policy has resulted, or will result, in economies of administration; or a group of insurance agents of an insurer, which insurer is the policyholder; (b) Certificates evidencing coverage under the policy are issued to residents of this state and contain in contrasting color and not less than 10-point type the following statement: The benefits of the policy providing your coverage are governed primarily by the law of a state other than Florida. ; and (c) The policy provides the benefits specified in s (3) Section is not applicable when residents of this state are enrolled for coverage under a policy or certificate issued in accordance with subsection (2). (4) Prior to solicitation in this state, a copy of the master policy and a copy of the form of the certificate evidencing coverage that will be issued to residents of this state shall be filed with the office for informational purposes. (5) Prior to solicitation in this state, an officer of the insurer shall truthfully certify to the office that the policy and certificates evidencing coverage have been reviewed and approved by the state in which the group policy is issued. (6) Any insurer who provides coverage under certificates of insurance issued to residents of this state shall designate one Florida-licensed resident agent as agent of record for the service of such certificates, unless the policy is issued to a group substantially as described in s , s , s , s , s , or s History. ss. 422, 809(2nd), ch ; s. 79, ch ; s. 98, ch ; s. 114, ch ; s. 30, ch. 99-3; s. 1138, ch Employee groups. Subject to all of the requirements of this section, the lives of a group of individual employees of an employer may be insured, for the benefit of persons other than the employer, under a policy issued to the employer or to the trustees of a fund established by an employer, which employer or board of trustees is deemed to be the policyholder. (1)(a) The employees eligible for insurance under the policy shall be all of the employees of the employer, or all of any class or classes of employees determined by conditions pertaining to their employment; however, a class of employees may not be created or permitted that consists solely of employees covered under the employer s group health plan. This section does not prohibit an employer from requiring participation in its group health plan as a condition of employment. (b) The policy may provide that the term employees includes the employees of one or more subsidiary corporations, and includes the employees, individual proprietors, and partners of one or more affiliated corporations, proprietors, or partnerships if the business of the employer and of the affiliated corporations, proprietors, or partnerships is under common control. The policy may provide that the term employees includes the individual proprietor or partners if the employer is an individual proprietor or a partnership. The policy may provide that the term employees includes directors of a corporate employer, former employees, or retired employees. Page 2 of 10

152 (c) A policy issued to insure the employees of a public body may provide that the term employees includes elected or appointed officials. (2) The premium for the policy shall be paid by the policyholder, either from the employer s funds or from funds contributed by the insured employees, or from both. A policy on which no part of the premium is derived from funds contributed by the insured employees must insure all eligible employees, or all except any as to whom evidence of individual insurability is not satisfactory to the insurer, except those employees who reject coverage in writing. (3) The amounts of insurance under the policy must be based upon some plan precluding individual selection either by the employees or by the employer or trustees. This section does not affect the provisions of ss History. s. 525, ch ; s. 1, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 423, 448, 809(2nd), ch ; s. 79, ch ; ss. 47, 114, ch ; s. 4, ch Debtor groups. The lives of a group of individuals may be insured under a policy issued to a creditor or its parent holding company, or to a trustee or trustees or agent designated by two or more creditors, which creditor, holding company, affiliate, trustee or trustees, or agent shall be deemed the policyholder, to insure debtors of the creditor or creditors, subject to the following requirements: (1) The debtors eligible for insurance under the policy shall be all of the debtors of the creditor or creditors or all of any class or classes thereof. The policy may provide that the term debtors includes: (a) Borrowers of money or purchasers or lessees of goods, services, or property for which payment is arranged through a credit transaction; (b) The debtors of one or more subsidiary corporations; and (c) The debtors of one or more affiliated corporations, proprietorships, or partnerships if the business of the policyholder and of such affiliated corporations, proprietorships, or partnerships is under common control. (2) The premium for the policy shall be paid either from the creditor s funds or from charges collected from the insured debtors, or from both. A policy on which part or all of the premium is to be derived from the collection from the insured debtors of identifiable charges not required of uninsured debtors shall not include, in the class or classes of debtors eligible for insurance, debtors under obligations outstanding at its date of issue without evidence of individual insurability unless at least 75 percent of the then eligible debtors elect to pay the required charges. A policy on which no part of the premium is to be derived from the collection of such identifiable charges must insure all eligible debtors, or all except any as to whom evidence of individual insurability is not satisfactory to the insurer. The policy may be issued only if the group of eligible debtors is then receiving new entrants at the rate of at least 100 persons yearly, or may reasonably be expected to receive at least 100 new entrants during the first policy year, and only if the policy reserves to the insurer the right to require evidence of individual insurability if less than 75 percent of the new entrants become insured. The policy may exclude from the classes eligible for insurance classes of debtors determined by age. (3) The amount of insurance on the life of any debtor shall at no time exceed the amount owed by the debtor which is repayable in installments to the creditor. (4) The policy shall provide that the insurer will furnish to the policyholder, for delivery to each insured debtor under the policy, a certificate of insurance describing the coverage and specifying that the death benefit shall first be applied to reduce or extinguish the indebtedness. The remainder, if any, shall be paid to the designated second beneficiary or the insured s estate. History. s. 526, ch ; s. 1, ch ; s. 3, ch ; s. 1, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 424, 448, 809(2nd), ch ; s. 79, ch ; s. 1, ch ; s. 114, ch ; s. 331, ch ; s. 4, ch Labor union groups. Subject to all of the requirements of this section, the lives of a group of individual labor union members or labor union members and their dependents may be insured, for the benefit of persons other than the union or any of its officials, representatives, or agents, under a policy issued to the labor union or to the trustees of a fund established in this state by the labor union, which labor union or board of trustees is deemed to be the policyholder. (1) The individuals eligible for insurance under the policy shall be all of the members of the union, or all of the members of any class or classes of union members determined by conditions pertaining to their employment or to membership in the union, or to both. A policy issued to the trustees of a fund established in this state by a labor Page 3 of 10

153 union may provide that the trustees or their employees, or both, may be insured under the policy if their duties are principally connected with such trusteeship. (2) The premium for the policy shall be paid by the policyholder either wholly from the policyholder s funds or from funds contributed by the employer or employers of the insured persons or by the labor union, or by both, or partly from such funds and partly from funds contributed by the insured members specifically for their insurance. A policy on which no part of the premium is to be derived from funds contributed by the insured members specifically for their insurance must insure all eligible members, or all except any as to whom evidence of individual insurability is not satisfactory to the insurer or except as to those who reject the coverage in writing. (3) The amounts of insurance under the policy must be based upon some plan precluding individual selection either by the members or by the union. History. s. 527, ch ; s. 1, ch ; s. 2, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 425, 448, 809(2nd), ch ; s. 79, ch ; ss. 48, 114, ch Trustee groups. Subject to all of the requirements of this section, the lives of a group of individual employees of employers or members of labor unions may be insured, for the benefit of persons other than the employers or unions, under a policy issued to the trustees of a fund established by two or more employers in the same industry or by two or more labor unions, or to the trustees of a fund established by one or more employers in the same industry and one or more labor unions or by one or more employers and one or more labor unions whose members are in the same or related occupations or trades, which board of trustees is deemed to be the policyholder. (1) A policy may not be issued under this section: (a) To insure employees of any employer whose eligibility to participate in the fund as an employer arises out of considerations directly related to the employer being a commercial correspondent or business client or patron of another employer, regardless of whether the other employer is or is not participating in the fund. (b) To insure employees of any employer not located in this state, unless the majority of the employers whose employees are to be insured are located in this state, or unless the employer has assumed obligations through a collective bargaining agreement and is participating in the fund either pursuant to those obligations with regard to one or more classes of employees encompassed in the collective bargaining agreement or as a method of providing insurance benefits for other classes of employees, or unless the policy is issued to the trustees of a fund established by two or more labor unions. (2)(a) The persons eligible for insurance shall be all of the employees of the employers or all of the members of the unions, or all of the members of any class or classes of employees or union members determined by conditions pertaining to their employment or to membership in the unions, or both. The policy may provide that the term employees includes retired employees, former employees, directors of a corporate employer, and the individual proprietor or partners if an employer is an individual proprietor or a partnership. The policy may provide that the term employees includes the employees of one or more subsidiary corporations, and the employees, individual proprietors, and partners of one or more affiliated corporations, proprietorships, or partnerships if the business of the employer and of the affiliated corporations, proprietorships, or partnerships is under common control. (b) Except as provided in paragraph (a) as to retired employees, an individual proprietor or partner is not eligible for insurance under the policy as an employee unless she or he is actively engaged in and devotes a substantial part of her or his time to the conduct of the business of the proprietor or partnership. The policy may provide that the term employees includes the trustees or their employees, or both, if their duties are principally connected with such trusteeship. (3) The premium for the policy shall be paid by the policyholder either wholly from the policyholder s funds or from funds contributed by the employer or employers of the insured persons or by the union or unions, or by both, or partly from such funds and partly from funds contributed by the insured persons. A policy may not be issued if the entire gross premium charged for the insurance by the insurer is derived from funds contributed by the insured employees or members specifically for their insurance. A policy on which no part of the premium is to be derived from funds contributed by the insured persons specifically for their insurance must insure all eligible persons, or all except any who reject the coverage in writing or as to whom evidence of individual insurability is not satisfactory to the insurer. For the purpose of determining the number of eligible persons who must be covered under a policy, dependents may not be included as eligible persons. (4) The policy must cover at date of issue not less than five individuals, other than individual proprietors or partners, from each employer unit unless: (a) The policy is issued to the trustees of a fund established by employers that have assumed obligations through a collective bargaining agreement and are participating in the fund either pursuant to those obligations with regard to Page 4 of 10

154 one or more classes of their employees which are encompassed in the collective bargaining agreement or as a method of providing insurance benefits for other classes of their employees. (b) The employer unit is a subsidiary corporation of an employer in the group or is an affiliated corporation, proprietorship, or partnership of an employer in the group whose business and that of such employer is under common control. (c) The policy is issued to the trustees of a fund established by two or more labor unions. (5) In addition to the requirements of subsection (4), if the fund is established by the members of a group of employers, the policy may be issued only if the participating employers constitute at the date of issue at least 60 percent of those employer members whose employees are not already covered for group life insurance or if the total number of persons covered at date of issue exceeds 600. The policy may not require that if a participating employer discontinues membership in the group of employers, the insurance of the employer s employees ceases solely by reason of the discontinuance. (6) The amounts of insurance under the policy must be based upon some plan precluding individual selection either by the insured persons or by the policyholder, employers, or unions. History. s. 528, ch ; s. 2, ch ; s. 1, ch ; s. 1, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 426, 448, 809(2nd), ch ; s. 79, ch ; ss. 49, 114, ch ; s. 332, ch Credit union groups. The lives of a group of individual credit union members may be insured under a policy issued to the credit union, which is deemed to be the policyholder. The premium shall be paid by the credit union insuring all of its eligible members for the amounts of insurance, not in excess of the share balance, as to each member. The policy shall be for the benefit of the share account of the member or some person or persons other than the credit union or its officials. All eligible members of a credit union may be insured. History. s. 529, ch ; s. 1, ch. 63-6; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 427, 448, 809(2nd), ch ; s. 79, ch ; ss. 50, 114, ch Additional groups. (1) An insurer may afford coverage under a group policy issued under this subsection if all of the following conditions are satisfied: (a) The issuance of the group policy is not contrary to the best interests of the public. (b) Coverage under the group policy is afforded on an actuarially sound basis. (c) The group policy results in economies of acquisition or administration of a magnitude comparable to other group policies under this part. (d) The premium for the policy is paid by the policyholder either from policyholder funds or from funds contributed by the covered persons, or from both. (e) The group consists at all times of not less than five persons. (f) Eligibility for participation in the group is not based on the health of an individual participant. (g) The group was organized and exists primarily for purposes other than the procurement of insurance. (h) The composition of the group to which the policy is to be issued is not substantially similar to one of the groups specified in ss (2) An insurer shall inform the office of the effectuation of any coverage under this section within 30 days after effectuation of coverage. The insurer is responsible for establishing that the criteria of subsection (1) have been satisfied. History. ss. 428, 809(2nd), ch ; s. 79, ch ; ss. 51, 114, ch ; s. 1139, ch Group life insurance; association groups. Subject to all of the requirements of this section, the lives of a group of individual members of an association or members and their employees or dependents may be insured, for the benefit of persons other than the association or any of its official representatives or agents, under a policy issued to the association or to the board of trustees of a fund established in this state for the association, if the members of the association are engaged in a particular profession and are licensed to engage in the profession in this state and if the association has been in existence for at least 2 years and holds regular meetings not less than annually to further the purposes of the association members. The association or board of trustees is deemed to be the policyholder of the group life insurance policy. (1) The members eligible for insurance under the policy shall be all of the members of the association, or all of any class or classes of members of the association determined by conditions pertaining to their profession or to membership in the association, or to both. A policy issued to the trustees of a fund established in this state by an Page 5 of 10

155 association may provide that the trustees or their employees, or both, may be insured under the policy if their duties are principally connected with the trusteeship. (2) The premium for the policy shall be paid by the policyholder either wholly from the policyholder s funds or funds contributed by the insured persons or by the association, or by both, or partly from such funds and partly from funds contributed by the insured members specifically for their insurance, subject to the following: (a) A policy on which part of the premium is derived from funds contributed by the insured members specifically for their insurance may be placed in force only if at least 100 of the then eligible members elect to make the required contributions. The policy may contain a provision requiring evidence of insurability of individual members. (b) A policy on which no part of the premium is derived from funds contributed by the insured members specifically for their insurance must insure all eligible members. (3) The association must have been in existence for at least 2 years prior to the issuance of the policy; its annual dues must actually be collected from its members; and it must not have been organized for the sole and exclusive purpose of qualifying for insurance under this section. (4) If a dividend, premium refund, rate reduction, commission, or service fee is received by any association or by the trustees of a fund established in whole or in part by an association, under any group insurance policy issued for delivery in this state, with respect to which they are the policyholder, covering the members of the association, to which the members contribute to the cost of the premiums for the insurance, the excess, if any, of the aggregate of the dividends, premium refunds, rate reductions, commissions, and service fees over the aggregate expenditure of the association or trustees towards the cost of such insurance, including its administration, for the current and preceding 2 years, to the extent that they were not defrayed by dividends, premium refunds, rate reductions, commissions, and service fees, shall be applied by the policyholder for the sole benefit of insured members on a basis which precludes individual selection and unfair discrimination. History. s. 1, ch ; s. 164, ch ; s. 1, ch ; s. 1, ch ; s. 3, ch ; s. 212, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 445, 448, 809(2nd), ch ; s. 79, ch ; ss. 52, 114, ch Note. Former s Group life insurance for dependents. Except for a policy issued under s , a group life insurance policy may be extended to insure the employees or members against loss due to the deaths of their spouses and dependent children or any class or classes thereof, subject to the following: (1) The premium for the insurance shall be paid either from funds contributed by the employer, union, association, or other person to whom the policy has been issued or from funds contributed by the covered persons, or from both. Except as provided in subsection (2), a policy on which no part of the premium for the spouse s and dependent child s coverage is to be derived from funds contributed by the covered persons shall insure all eligible employees or members with respect to their spouses and dependent children or any class or classes thereof. (2) An insurer may exclude or limit the coverage on any spouse or dependent child as to whom evidence of individual insurability is not satisfactory to the insurer. (3) The amounts of insurance for any covered spouse or dependent child under the policy may not exceed the amount of insurance for which the employee or member is insured. History. ss. 429, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 5, ch Provisions required in group contracts. No policy of group life insurance shall be delivered in this state unless it contains in substance the provisions set forth in ss or provisions which in the opinion of the office are more favorable to the persons insured, or at least as favorable to the persons insured and more favorable to the policyholder; except that: (1) Sections inclusive do not apply to policies issued to a creditor to insure debtors of such creditor; (2) The standard provisions required for individual life insurance policies do not apply to group life insurance policies; and (3) If the group life insurance policy is on a plan of insurance other than the term plan, it shall contain a nonforfeiture provision or provisions which in the opinion of the office is or are equitable to the insured persons and to the policyholder, but nothing in this section shall be construed to require that group life insurance policies contain the same nonforfeiture provisions as are required for individual life insurance policies. History. s. 531, ch ; ss. 13, 35, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 430, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 1140, ch Page 6 of 10

156 Grace period. A group life insurance policy shall provide that the policyholder is entitled to a grace period of 31 days for the payment of any premium due except the first, during which grace period the death benefit coverage shall continue in force, unless the policyholder has given the insurer written notice of discontinuance in advance of the date of discontinuance and in accordance with the terms of the policy. The policy may provide that the policyholder is liable to the insurer for the payment of a pro rata premium for the time the policy was in force during such grace period. History. s. 532, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 431, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Incontestability. A group life insurance policy shall provide that the validity of the policy shall not be contested, except for nonpayment of premium, after it has been in force for 2 years from its date of issue. No statement made by any person insured under the policy relating to that person s insurability shall be used in contesting the validity of the insurance with respect to which the statement was made after the insurance has been in force prior to the contest for a period of 2 years during that person s lifetime nor unless it is contained in a written instrument signed by her or him. History. s. 533, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 432, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 333, ch Application; statements deemed representations. A group life insurance policy shall provide that a copy of the application, if any, of the policyholder be attached to the policy when issued, that all statements made by the policyholder or by the persons insured be deemed representations and not warranties, and that no statement made by any person insured be used in any contest unless a copy of the instrument containing the statement is or has been furnished to such person or to her or his beneficiary. History. s. 534, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 433, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 334, ch Insurability. A group life insurance policy shall contain a provision setting forth the conditions, if any, under which the insurer reserves the right to require a person eligible for insurance to furnish evidence of individual insurability satisfactory to the insurer as a condition to part or all of her or his coverage. History. s. 535, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 335, ch Misstatement of age. A group life insurance policy shall contain a provision specifying an equitable adjustment of premiums or of benefits, or of both, to be made in the event the age of a person insured has been misstated. The provision shall contain a clear statement of the method of adjustment to be used. History. s. 536, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 434, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Payment of benefits. A group life insurance policy shall provide that any sum becoming due by reason of the death of the person insured be payable to the beneficiary designated by the person insured, except that, when the policy contains conditions pertaining to family status, the beneficiary may be the family member specified by the policy terms, subject to the provisions of the policy in the event there is no designated beneficiary living at the time of death of the person insured; all or any part of such sum shall be subject to any right reserved by the insurer in the policy and set forth in the certificate to pay at its option a part of the sum not exceeding $2,000 to any person appearing to the insurer to be equitably entitled thereto by reason of having incurred funeral or other expenses incident to the last illness or death of the person insured. History. s. 537, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 435, 448, 809(2nd), ch ; s. 79, ch ; s. 99, ch ; s. 114, ch Certificate. A group life insurance policy shall provide that the insurer will issue to the policyholder for delivery to each person insured an individual certificate containing the group number and describing the insurance protection to which the certificateholder is entitled, those to whom the insurance benefits are payable, any dependent s coverage included in the certificate, the rights and conditions set forth in ss , , and , the person to whom the insurance benefits are payable, and the person insured; except that for employee groups as defined in s the certificate may, in lieu of including the name of the person insured and the person to whom benefits are payable, contain the following statement prominently displayed in 10-point type or Page 7 of 10

157 larger and in a contrasting color: This certificate provides life insurance for the employees and dependents, if applicable, of (employer s name and address) under (group contract number). The employee shall be given a copy of the group enrollment application. The benefits are payable to the beneficiaries of record designated by the employee. Current records shall be maintained by the employer and the insurer of all insured persons and beneficiaries. History. s. 538, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 436, 448, 809(2nd), ch ; s. 79, ch ; s. 1, ch ; s. 114, ch Conversion on termination of eligibility. A group life insurance policy shall provide that, if the insurance, or any portion of it, on a person covered under the policy or on the dependent of a person covered ceases because of termination of employment or of membership in the class or classes eligible for coverage under the policy, such person is entitled to have issued to her or him by the insurer, without evidence of insurability, an individual policy of life insurance without health or other supplementary benefits, provided application for the individual policy is made, and the first premium is paid, to the insurer within 31 days after such termination, and provided further that: (1) The individual policy shall, at the option of such person, be on any one of the forms then customarily issued by the insurer at the age and for the amount applied for, except that the group policy may exclude the option to elect term insurance; (2) The individual policy shall be in an amount not in excess of the amount of life insurance which ceases because of such termination, less, in the case of a person whose membership in the class or classes eligible for coverage terminates but who continues in employment in another class, the amount of any life insurance for which such person is or becomes eligible under any other group policy within 31 days after such termination, provided that any amount of insurance which has matured on or before the date of such termination as an endowment payable to the person insured, whether in one sum or in installments or in the form of an annuity, shall not, for the purposes of this provision, be included in the amount which is considered to cease because of such termination; and (3) The premium on the individual policy shall be at the insurer s then customary rate applicable to the form and amount of the individual policy, to the class of risk to which such person then belongs, and to such person s age attained on the effective date of the individual policy. A conversion privilege shall be available to a surviving dependent, if any, at the death of the employee or member, with respect to the coverage under the group policy which terminates by reason of such death, and to the dependent of the employee or member upon termination of coverage of the dependent, while the employee or member remains insured under the group policy, by reason of the dependent ceasing to be a qualified family member under the group policy. History. s. 539, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 437, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 336, ch Conversion on termination of policy. A group life insurance policy shall provide that, if the group policy terminates or is amended so as to terminate the insurance of any class of insured persons, every person insured thereunder at the date of such termination whose insurance terminates, including the insured dependent of a covered person, and who has been so insured for at least 5 years prior to such termination date is entitled to have issued to her or him by the insurer an individual policy of life insurance, subject to the same conditions and limitations as are provided by s , except that the group policy may provide that the amount of such individual policy shall not exceed the smaller of: (1) The amount of the person s life insurance protection ceasing because of the termination or amendment of the group policy, less the amount of any life insurance for which she or he is or becomes eligible under any group policy issued or reinstated by the same or another insurer within 31 days after such termination; or (2) Ten thousand dollars. History. s. 540, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 438, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 337, ch Death pending conversion. A group life insurance policy shall provide that, if a person insured under the policy dies during the period within which she or he would have been entitled to have an individual policy issued in accordance with s or s and before such an individual policy has become effective, the amount of life insurance which she or he would have been entitled to have issued under the individual policy shall be payable as a claim under the group policy, whether or not application for the individual policy or the payment of the first premium therefor has been made. Page 8 of 10

158 History. s. 541, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 439, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 338, ch Continuance of coverage during disability. When active employment is a condition of group life insurance, the policy shall provide that an insured may continue coverage during the insured s total disability by timely payment to the policyholder of that portion, if any, of the premium that would have been required from the insured had total disability not occurred. The continuation shall be for a period of at least 6 months from the date on which the total disability started. History. ss. 440, 809(2nd), ch ; ss. 56, 79, ch ; s. 114, ch Waiver of premium for disabled insured. A waiver of premium for any insured who is totally disabled for a period of at least 6 months shall be made available to the policyholder as a part of the application for any group life insurance policy. History. ss. 441, 809(2nd), ch ; s. 79, ch ; s. 114, ch Use of dividends, refunds, rate reductions, commissions, service fees. If a dividend, premium refund, rate reduction, commission, or service fee is received by any employer, labor union, or association, under any and all group insurance policies whenever issued and delivered in this state, with respect to which the employer, labor union, or association is the policyholder, or an affiliate or subsidiary of the policyholder, covering the employees of one or more employers or the members of one or more labor unions or associations, or any combination thereof, to which such employees or members contribute to the cost of the premiums for such insurance, the excess, if any, of the aggregate of such dividends, premium refunds, rate reductions, commissions, and service fees over the aggregate expenditure of such employer, labor union, or association towards the cost of such insurance, including its administration, for the current and preceding 2 years to the extent that they were not defrayed by dividends, premium refunds, rate reductions, commissions, and service fees, shall be applied by the policyholder for the sole benefit of insured employees or members on a basis which precludes individual selection and unfair discrimination. If such dividend, premium refund, rate reduction, commission, or service fee is received by a trusteed fund, it shall be applied by the trustees for the sole purposes of the trust. History. s. 542, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 442, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Premium rates. A life insurer may issue insurance policies under the provisions of this part at premium rates less than the usual rates or premiums for individual insurance policies. History. s. 543, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 443, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Assignment of incidents of ownership in group life insurance policies, including conversion privileges. (1) Nothing in this code or in any other law shall be construed to prohibit any person insured under a group life insurance policy from making an assignment of all or any part of her or his incidents of ownership under such policy, including, but not limited to, the privilege of having issued to the person an individual policy of life insurance pursuant and subject to the provisions of ss and and the right to name a beneficiary. Subject to the terms of the policy, agreement, or arrangement among the insured, the group policyholder, and the insurer, relating to assignment of incidents of ownership thereunder, such an assignment by an insured, whenever made, is valid for the purpose of vesting in the assignee, in accordance with any provisions included therein as to the time at which it is to be effective, all of such incidents of ownership so assigned, but without prejudice to the insurer on account of any payment it may make or individual policy it may issue in accordance with ss and prior to receipt of notice of the assignment. (2) The purpose of subsection (1) is to declare and codify existing rights under policies of the types described therein. History. ss. 1, 3, ch ; s. 3, ch ; s. 1, ch ; ss. 2, 3, ch ; ss. 444, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch ; s. 339, ch Notification to insureds of cancellation or expiration. Every insurer delivering or issuing for delivery a group life insurance policy under the provisions of this part shall notify each certificateholder when the master policy has expired or when the master policy has been canceled. The insurer may take such action through the policyholder; and, if the insurer elects to take such action through the policyholder, the insurer shall be deemed Page 9 of 10

159 to have complied with the provisions of this section upon notifying the policyholder of the requirements of this section and requesting the policyholder to forward to the certificateholders the notice required in this section. Upon receipt of such a request, the policyholder shall forward, as soon as practicable, the notice of expiration or cancellation to each certificateholder covered under the policy. History. ss. 1, 3, ch ; s. 114, ch Replacement or termination of group life insurance; liability of prior insurer. When an insurance purchaser replaces or terminates an existing group life contract, the prior insurer remains liable only to the extent of its accrued liabilities and extensions of benefits as required by s History. s. 1, ch ; s. 3, ch ; s. 1, ch ; ss. 1, 3, ch ; ss. 2, 3, ch ; ss. 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Liability of succeeding insurer on replacement of group policy. (1) Each person who is eligible for coverage in accordance with the succeeding insurer s plan of benefits shall be covered by that insurer s plan of benefits unless such coverage would result in duplication of benefits payable under the prior insurer s plan. (2) Each person not covered under the succeeding insurer s plan of benefits in accordance with subsection (1) must be covered by the succeeding insurer in accordance with the following provisions if such individual was validly covered, including benefit extensions, under the prior plan on the date of discontinuance of the prior plan and if such individual is a member of the class or classes of individuals eligible for coverage under the succeeding insurer s plan. (a) The minimum level of benefits to be provided by the succeeding insurer shall be the applicable level of benefits of the prior insurer s plan reduced by any benefits payable by the prior plan. (b) Coverage must be provided by the succeeding insurer until at least the earliest of the following dates: 1. The date the individual becomes eligible under the succeeding insurer s plan as described in subsection (1). 2. The date the individual s coverage would terminate in accordance with the succeeding insurer s plan provisions applicable to individual termination of coverage, for example, at termination of employment. 3. When an individual was totally disabled immediately prior to the date the succeeding insurer s coverage became effective and the policy of the prior insurer did not conform to s , the date of the end of any period of extension or accrued liability which would have been required of the prior insurer by s , had s been applicable. History. ss. 2, 3, ch ; s. 2, ch ; ss. 446, 448, 809(2nd), ch ; s. 79, ch ; s. 100, ch ; s. 114, ch Extension of benefits. (1) Every group life policy which is delivered or issued for delivery in this state or under which benefits are altered, modified, or amended shall provide a reasonable provision for extension of benefits for those individuals who become totally disabled while insured under the policy and who continue to be totally disabled at the date of discontinuance of the policy, as required by subsection (2). (2) A reasonable provision for extension of benefits in the case of a group life plan is either premium waiver extension, extended death benefit for a period of at least 12 months in the event of total disability, or payment of income for a specified period during total disability. The discontinuance of the group policy shall not operate to terminate such extension. History. ss. 2, 3, ch ; s. 2, ch ; ss. 447, 448, 809(2nd), ch ; s. 79, ch ; s. 114, ch Page 10 of 10