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life annuities is not subject to regulation under the Blue Sky laws. The Texas court, in Daniel v. Life Ins. Co.,86 took cognizance of this seeming incongruity. The court first noted that the sale of annuities was largely confined to insurance companies then went on to point out:
For many years there has been an ever-growing tendency of life insurance companies to encroach upon the field of investment by loading their policies with an increasing variety of purely investment features. This fact, however, does not affect the character of a contract made by an insurance company as to whether it is insurance vel non, nor does it broaden the definition to include as insurance that which is not in fact properly so classified. 67
Thus, it can be concluded that even though an annuity is basically an investment, the fact that the sale of annuities has been largely handled by insurance companies and is regarded as "insurance business” has led to regulation by the insurance commissioners and exemption from the requirements of the Blue Sky laws.
Traditionally, state insurance departments have not regulated annuities furnished by governments, federal, state or municipal. Similarly, state insurance departments have not regulated annuities furnished by individuals through legacy, gift or contract, although an insurance department might well regulate the last if the individual wrote enough contracts to constitute the doing of an annuity business. With very few exceptions insurance departments have not attempted to regulate life care plans, annuities furnished by colleges, or annuities furnished by employers except where life insurance contracts have been used. Insurance departments have also refrained from regulating annuities payable in terms of goods or service. Up to the present time no insurance department has attempted to regulate a variable annuity that has not been written in connection with a life insurance company.
Only one case has been found where a state insurance department has attempted to regulate an annuity that was not "chargeable against the person of the grantor.??68 State insurance departments have not attempted to regulate the sale of annuities certain by companies other than life insurance companies. Regulation has been confined primarily
85 Haberman v. Equitable Life Assur. Socy of United States, 224 F.2d 401 (5th Cir. 1955), cert. denied, 350 U.S. 948 (1956); Bates v. Equitable Life Assur. Soc'y of United States, 206 Minn. 482, 288 N.W. 834 (1939); Hamilton v. Penn Mut. Life Ins. Co., 196 Miss. 345, 17 So. 2d 278 (1944).
86 102 S.W.2d 256 (Tex. Civ. App. 1937). 87 Id. at 260. (Emphasis added.)
88 In re Supreme or Cosmopolitan Council, 193 Misc. 996, 86 N.Y.S.2d 127 (Sup. Ct. 1949).
to the sale of fixed-dollar annuities either for life or for a period certain by life insurance companies.
1. Fixed-Dollar Life Annuity Contracts It seems clearly established that the conventional type of fixed-dollar annuity contract which has been sold in such large numbers by life insurance companies falls under the exclusive regulation and control of insurance departments.69 This is usually the result of custom and tradition, and of the natural evolution of life insurance companies in this country. There seems to be no dispute about the jurisdiction of the insurance commissioners over these contracts, even in the absence of specific language in some of the state statutes clearly spelling out this jurisdiction.70 The Missouri statute was before the rt in Carroll v. Equitable Life Assur. Soc'y of United States.71 The court said that while an annuity is not insurance, nevertheless insurance companies are given the specific power by statute to provide annuities.72 In other words, regardless of whether an annuity is construed to be insurance or not, life insurance companies have under state statutes the power to sell annuities, at least of the traditional type.
Over the years life insurance laws and regulations have been designed to protect the policyholder, i.e., to ascertain as nearly as possible that the company will meet its fixed-dollar obligations in the future as they mature. The process involves the collection of dollars and the payment of dollars in the future under certain specified circumstances. The concern has been with solvency in dollars. The legal requirements are satisfied if the company meets its commitments as they occur and if it is at all times prospectively in a position to meet its outstanding commitments. The company has “made sure” that the annuitant will receive a specified number of dollars as long as he lives no matter whether that be for one month or thirty years, or longer. The company has, therefore, furnished "insurance.” The fact that these dollars may be worth only fifty cents in terms of purchasing power is immaterial. If a company can pay out
69 Cases cited note 65 supra.
70 The Missouri statute presents a statutory pattern which is representative of the largest number of state statutes. The Missouri law provides that persons may be associated "for the purpose of making insurance upon the lives of individuals, and every assurance pertaining thereto or connected therewith, and to grant, purchase and dispose of annuities and endowments of every kind and description whatsoever ." Mo. Ann. Stat. § 376.010 (1952).
71 9 F. Supp. 223 (W.D. Mo. 1934). 72 Id. at 224.
only ninety-nine cents on the dollar the company is insolvent and has fallen down on the job it has undertaken. Insurance-department regulation has been developed specifically to meet this problem.
2. Life Insurance Companies Selling Variable Annuities The laws of two states, New Jersey and Kentucky, now expressly permit life insurance companies to sell variable annuities through a segregated account.73 Two life insurance companies have been organized in the District of Columbia and one in Arkansas with authority to sell variable life annuities without the benefit of special statutes.74
The Supreme Court has now determined that life insurance companies selling variable annuities will be regulated by the Securities and Exchange Commission. The rationale of the Court seems to be that, while the companies were licensed as insurance companies and have some insurance features, they also have the features of a security of a type that the conventional insurance company regulatory system is not designed to handle, and that the public should have the benefit of the type of protection afforded by the regulation of the sale of securities.
The two District of Columbia insurance companies were organized as life insurance companies and used life insurance company language throughout their contracts and sales material. They sold term life insurance benefits and the conventional type of waiver-of-premium benefits in total and permanent disability. Annuity contracts included a small amount of term life insurance at the beginning. The expense and mortality elements of the contract were guaranteed in the same manner as for any nonparticipating life insurance company. If the mortality and expense assumptions upon which the rate was based and the benefits were calculated were adverse, the loss would be borne by the stockholders and not the policyholders. Any gains from mortality or expenses increased the surplus of the company and benefited the stockholders rather than the policyholders, but neither the company nor the stockholders took any risks as to the investment element in the contract. Any capital gains or losses, either realized or unrealized, and any investment income on the funds supporting the reserves were reflected in increased or decreased benefits to the policyholders. In short, the entire investment risk was shifted from the company to the policyholders.
73 Statutes cited notes 54 and 55 supra.
74 The District of Columbia companies are the Variable Annuity Life Insurance Company and the Equity Annuity Life Insurance Company. The Arkansas company is the Participating Annuity Life Insurance Company.
75 SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959). But see text following note 61, supra.
As the question of regulating these companies came before the Supreme Court, the Court had to consider that these companies had six insurance features or elements, as follows: (1) The companies were incorporated as life insurance companies. (2) They purported to be life insurance companies and used life insurance company language in their policies and literature. (3) They agreed to indemnify the annuitants against any mortality losses, i.e., mortality gains or losses would affect the stockholders and not the policyholders. (4) They agreed to indemnify the annuitants against an increase in expenses, i.e., expense gain or loss would affect the stockholders only and not the annuitants. (5) They wrote fixed-dollar term life insurance coverage both as an integral part of the annuity contracts and separately. (6) They wrote fixed-dollar waiver-of-premium benefits in the event of total and permanent disability.
Notwithstanding these six insurance elements the Supreme Court decided that these companies should be regulated by the SEC. Thus, a dual regulatory system has been established for life insurance companies selling variable life annuities.
3. Regulation of Trusteed Pension Plans Most trusteed pension plans are administered by a trust company which is regulated by the banking commissioner in the state where the trustee is located. With rare exceptions, these plans are qualified with the Treasury Department and must meet the requirements of the Internal Revenue Code relating to such qualifications. The annuities provided by trusteed pension plans are not regulated by state insurance departments. The question of insurance-department regulation has not reached the courts, probably because the techniques of regulation applicable to life insurance companies would not fit nearly as well if applied to pension trusts for reasons which will be explained below. Pension-trust annuities generally do not "charge the person of the grantor."
OF CERTAIN TYPES OF VARIABLE ANNUITIES The Keystone Retirement Equity Trust and United Funds, Inc., have certain elements in common. They do not include any of the six insurance elements referred to earlier. That is, they are not licensed as life insurance companies, do not purport to function as life insurance com
76 Int. Rev. Code of 1954, $ 401(a).
panies, do not sell term life insurance or offer waiver-of-premium benefits, and do not guarantee the mortality or expense elements of their variable annuity provisions.
In these two instances the annuity is not "charged against the person of the grantor.” The trustee is not personally liable and is not a debtor. The rights of the annuitants are limited to a charge against the assets of the trusts, and the obligation of the trustee is simply to manage other people's money in a prudent way. No one undertakes to indemnify or guarantee the annuitants. The annuitants enjoy full mutuality among themselves, and bear all the risks. Consequently, there is no insurance element. The system of insurance regulation designed to deal with conventional fixed-dollar annuities is inappropriate. The system of regulation designed to protect the public against the sale and handling of investments is peculiarly appropriate.
The argument that these types of annuities should not be regulated by the insurance departments and should be regulated exclusively by securities departments runs along the following lines.
A life insurance company must assume some risk. The very words "insurance" and "assurance” mean something that "makes sure.” The insurance company must indemnify or guarantee something, or at least take some risks that subject it to legal liability. This is but another way of saying that annuities written by life insurance companies must at least meet the definition laid down by Lord Coke. They must "charge the person of the grantor.” A life insurance company cannot write an annuity chargeable only against so much personal property.
Perhaps the leading case holding that there must be some assumption of risk by the insurance company is Helvering v. Le Gierse." In this case the deceased had bought, at age eighty, a life-annuity contract from a life insurance company for a single premium of $4,179. At the same time she bought a single-premium whole life insurance policy in the face amount of $25,000 for a single premium of $22,956. There was no medical examination. The insurance policy would not have been issued without the annuity contract, but otherwise the two contracts were entirely separate. The Supreme Court held that the proceeds of the life insurance policy issued by a life insurance company were not insurance within the meaning of the federal estate tax law. The Court said:
Historically and commonly insurance involves risk-shifting and risk-distributing. That life insurance is desirable from an economic and social standpoint as a device to shift and distribute risk of loss from premature death is unquestion
77 312 U.S. 531 (1941).