The Office of General Counsel issued the following informal opinion on November 26, 2002, representing the position of the New York State Insurance Department.
Re: Association Group Life Insurance
Questions Presented:
1) May an association purchase a group life insurance policy to cover its members and have the insured members designate it as the beneficiary under the policy?
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2) May an association purchase such a group life insurance policy and have its insured members designate their estate as the beneficiary, in anticipation that the member will designate the association as recipient of the policy proceeds?
Conclusions:
1) No, such a designation would be contrary to New York Insurance Law § 4216(b)(12)(D) (McKinney 2000).
2) Yes, however, if the association were to require such a designation in the members will, it would be viewed as a subterfuge to avoid New York Insurance Law § 4216(b)(12)(D).
Facts:
A licensed life insurance agent that, presumably, represents an association (“Association”) that was the subject of an article in the October 20, 2002 New York Times submitted an inquiry to the Department. The Association was formed in 1993 and is composed of individuals who are now citizens of the United States and who served in the army of the former Soviet Union during World War II. At present, the Association has in excess of 2,000 members. The membership, however, is diminishing as members die since, given the requirement of army service for the former Soviet Union during World War II, it is improbable that new members will join the Association.
The Association presently provides its members with “legal, health, social, community and many other services” and funds such benefits through “membership dues, sale of tickets, memorable medals, souvenirs, and charitable donations.” The Association would like to purchase a group life insurance policy covering its members and use the proceeds to “provide funding for the final expenses for its members, including better deals with funeral homes and buying lots at wholesale prices close to communities.” In addition, it is anticipated that the proceeds of the policy would replace the dues income lost to the Association through the death of its members. The policy would automatically cover each member of the Association, and the Association would pay the premiums from members dues.
Analysis:
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New York Insurance Law 1101(a) (McKinney 2000) defines doing an insurance business:
New York Insurance Law § 1102 (McKinney 2000) prohibits the doing of an insurance business without either a license from this Department or an exemption from the requirement to obtain such a license.
The provision of burial plots by an organization solely by virtue of membership in the organization would constitute the doing of an insurance business, since both a benefit of pecuniary value and fortuity are present. Accordingly, those organizations that provide such plots are either licensed by this Department as fraternal benefit societies or are, pursuant to New York Insurance Law § 4522 (McKinney 2000), exempt from such requirement.
If, however, the organization were to be of a type described in New York Not-For-Profit Corporation Law § 1513(a) (McKinney 1997), “a membership or religious corporation or unincorporated association or society which provides burial benefits for its members”, it may purchase burial plots from a cemetery corporation and resell them to its members. If the organization should resell the plots for less than its cost and recoup the difference from another source, it would not be in violation of New York Insurance Law §§ 1101 and 1102.
New York Insurance Law § 3208(d) (McKinney 2000 and 2002 Supplement) provides, in pertinent part:
If the Association were to pay an equal benefit to the representative of each deceased member, whether or not such representative purchased a burial plot from the Association, New York Insurance Law § 3208(d) would not be violated by either the Association or the insurer issuing the group policy.
However, the means by which were proposed that the Association would secure the funds to sell burial plots at less than cost would not be permitted by the New York Insurance Law. New York Insurance Law § 4216(b) provides, in pertinent part:
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It is presumed that the Association presently meets the requirements of New York Insurance Law § 4216(b)(12)(A)
It was speculated that the prohibition on the Association being the beneficiary is based upon a lack of insurable interest. It cannot be definitely indicated that such surmise is correct. However, it is probable that such surmise is correct since the restriction on the policyholder being the beneficiary of the proceeds of a group life insurance policy has been present since this type of insurance was first authorized for purchase by employers in 1918 (1918 N.Y. Laws 192; New York Insurance Law § 101-a (Parker 1918)), and because permission for benefits to be payable under a group life insurance policy to the employer involved an amendment to the insurable interest statute (New York Insurance Law § 3205 (McKinney 2000 and 2002 Supplement)).
New York Insurance Law § 3205(d) provides, in pertinent part:
As a concomitant, the prohibition on group life insurance benefits being payable to an employer-policyholder is, pursuant to New York Insurance Law § 4216(i)(1), deleted for group life insurance policies issued in accordance with New York Insurance Law § 3205(d).
Since there is no comparable provision allowing an association to fund members benefits through life insurance, New York Insurance Law § 4216(b)(12)(D) by its terms would prohibit the policy benefits being made payable to the Association.
As to the alternative proposal that the benefits be payable to the members estate, in anticipation that the member would direct in his will that the proceeds be paid to the Association; so long as such a beneficiary designation and testamentary designation were voluntary, this Department would interpose no objection. While a written agreement to make a testamentary designation is valid, New York Estates Powers and Trust Law § 13-2.1 (McKinney 2001), requiring the member to designate his or her estate as the beneficiary and/or enter into an agreement to provide in the will for the naming of the Association as a payee of the policy proceeds, as a condition to receiving coverage under the group life insurance policy would be viewed by this Department as an improper subterfuge to avoid the strictures of New York Insurance Law § 4216(b)(12)(D).
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.
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