LIFE POLICY TYPES · 6 MIN READ

Business Uses, Insurer Organizations, and Market Rules

Life insurance solves business and estate problems. A buy-sell agreement funds the purchase of a deceased owner's interest: in a cross-purchase plan, each owner buys policies on the others and personally receives the proceeds to buy the decedent's share; in a stock redemption (entity) plan, the corporation owns the policies, is the beneficiary, and redeems the shares itself. Joint first-to-die policies can fund buy-sells with a single contract. Executive benefit designs include the Section 162 executive bonus plan, where the employer pays (and deducts as compensation) premiums on a policy the executive owns, and split-dollar arrangements, which divide premiums and benefits between employer and employee under either the endorsement method (employer owns the policy) or the collateral assignment method (employee owns it, employer's premiums secured by assignment). Pension maximization elects a single-life pension plus life insurance for the spouse — its principal risk is that if the policy lapses, the irrevocable single-life election leaves the survivor with no income. Estate planners use irrevocable life insurance trusts and watch incidents of ownership, which pull a policy into the taxable estate. On the abuse side, stranger-originated and investor-originated life insurance (STOLI/IOLI) are schemes where investors instigate a policy on a stranger's life, defeating the insurable interest requirement. Insurers themselves come in different forms. A stock insurer is owned by shareholders; a mutual insurer is owned by its policyholders, who receive divisible surplus as dividends and voting rights. In a full demutualization, policyholders' membership interests are exchanged for stock, cash, or policy credits, while the insurance contract itself continues unchanged. Other structures include fraternal benefit societies (tax-exempt membership organizations), reciprocal inter-insurance exchanges managed by an attorney-in-fact, Lloyd's-style syndicates, captives formed to insure their parent's risks (small captives can elect taxation only on investment income under Section 831(b)), risk retention groups authorized by the federal Liability Risk Retention Act of 1986, and surplus lines (non-admitted) carriers — since the 2010 NRRA, only the insured's home state regulates and taxes a surplus lines placement. Self-insured multiple-employer arrangements (MEWAs) covering unrelated employers face both ERISA and state insurance regulation. When a carrier fails, state guaranty associations — coordinated nationally by NOLHGA — protect policyholders up to statutory limits, commonly $250,000 in annuity present value and $300,000 in life death benefits per insured per insurer. On the sales side, the NAIC Suitability in Annuity Transactions Model Regulation (best-interest revision) requires producers recommending annuities to satisfy four obligations: care, disclosure, conflict of interest management, and documentation — expressly without creating a fiduciary duty. Reinsurance spreads insurer risk: yearly renewable term (YRT) reinsurance cedes only the mortality risk on the net amount at risk, while coinsurance cedes a proportional share of premiums, reserves, and benefits.