Friday, July 12, 2019

No. 322: Pamela Yellen—Her Unbelievable "Bank-on-Yourself" Wealth-Building Strategy

Pamela Yellen was born in Buffalo, New York, on November 16, 1952. She graduated in 1974 from the University of San Francisco with a Bachelor of Arts degree, with emphasis in psychology. From 1984 to 1987 she was employed by a publication serving the camping and recreational vehicle industry. Later she became a consultant to more than 400,000 financial advisors across the U.S. and Canada. She is now a proponent of her "Bank-on-Yourself" system, which she calls a "safe wealth-building strategy." She is the author of two books: Bank on Yourself (2009) and The Bank on Yourself Revolution (2016). She donates 10 percent of her royalties to charities such as The Smile Train and The Nature Conservancy. She now lives with her husband outside Santa Fe, New Mexico. This post is based for the most part on her 2016 book.

The Endorsements
The subtitle of Yellen's 2016 book is "Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future." The first eight pages (before the title page and the other front matter in the book) contain 26 endorsements. Here are the first three:
"Even if you aren't ready to actually fire your banker, you need all the helpful information you can find in these uncertain economic times. Pamela Yellen once again is 'right on the money' when it comes to financial security."—Harvey Mackay, Author of the New York Times #1 bestseller Swim With the Sharks Without Being Eaten Alive,
Pamela Yellen should definitely win a Nobel Prize. With her guidance, you can grow a nest egg into a small fortune without the risks of conventional investments and political uncertainty. I urge you ... no, I beg you ... to get The Bank on Yourself Revolution. It's an investment in yourself and a book that will make a major difference in your life."—Joseph Sugarman, Entrepreneur, Author, and BluBlocker Corporation Founder,
"The Bank on Yourself Revolution provides a pathway to building your wealth and puts the traditional bank, stock and real estate markets firmly in the back seat. If you are searching for an alternative path to a secure retirement, this is a must read to grow your money safely and predictably ever[sic] year—even when the markets are crashing."—Kristi Frank, Star of Season One of Donald Trump's The Apprentice, well known for helping entrepreneurs start and grow their businesses,
The Dedication
Yellen dedicated her book to those she calls "Bank on Yourself revolutionaries." Here is the full dedication:
This book is dedicated to all the Bank on Yourself revolutionaries, the people who had the courage to question today's conventional financial wisdom, buck the system, and set out on a path less traveled. In doing so, you created true financial security for yourselves and your families. You are my heroes and my inspiration.
Harsh Criticism of Alternatives
Most of Yellen's book is devoted to harsh criticism of financial alternatives to her Bank on Yourself system. She says on page 7 that over the years she has investigated "more than 450 different financial products, strategies, and vehicles, and only a few passed my due diligence tests." Here are some but not all the alternatives she criticizes (with page numbers shown in parentheses): synthetic collateralized debt obligations (7), adjustable-rate mortgages (9), mutual funds (19), 401(k) plans (29), certificates of deposit (31), real estate investments (33), gold and other precious metals (35), savings accounts (41), traditional whole life policies (44), buy term life insurance and invest the difference (60), equity indexed universal life policies (66), individual retirement accounts (104), paying off home mortgages (162), 529 college plans (174), uniform gifts and transfers to minors (176), student loans (177), and annuities (227).

The Bank on Yourself Plan
As I went through the book, I kept looking for a description of the Bank on Yourself plan. Sprinkled throughout are brief descriptions hinting that the plan is based on some form of life insurance. Not until near the end of the book (pages 255-257) did I find anything close to a detailed description. It begins with this paragraph:
Out of approximately 1,000 life insurance companies, we've found only a handful that offer policies that meet all four requirements needed to maximize the power of the Bank on Yourself concept. When your plan is designed by one of the 200 Bank on Yourself Authorized Advisors, they recommend companies that have the following features and advantages:
The first feature is that the company must offer dividend-paying whole life policies. Also, the company must have paid dividends to policyholders every year for at least the last 100 years. It is not clear how anyone can verify the payment of dividends for at least a century.

The second feature is that the company must not use direct recognition. That means the company pays the same dividends whether the policyholder has or has not taken out a policy loan.

The third feature is that the company must offer a paid-up additions rider (PUAR). Yellen says the authorized advisor's commission "is typically 50-70 percent lower than with a traditionally designed policy." She also says: "At least 50 percent of your premium will typically be directed into this [PUAR] rider." I think commissions on amounts deposited into PUARs are substantially smaller than commissions on premiums for whole life, especially in the first policy year. Therefore the total commission would be smaller than the commission that would have been paid if the entire premium had gone into the whole life base policy.

The fourth feature is that the company must be among the financially strongest in the country. That determination must be made based on financial strength ratings assigned to the company by several independent rating agencies. I will have more to say on this subject later.

Yellen's plan seems to contemplate frequent and large policy loans to make major purchases. For that reason, it is strange that she says nothing about the policy loan clause. Thus she does not say whether the policy loan interest rate should be fixed or variable, what the rate should be if it is a fixed rate, or, if it is a variable rate, how the rate should be determined and what the maximum rate should be.

Accessing Yellen's System
Yellen does not publish a list of life insurance companies that meet her criteria. She says she is an educator, not a financial advisor, and therefore is prohibited from naming specific companies. She does not say whether she is a licensed insurance agent. She says developing a plan for the client is the job of an "Authorized Bank on Yourself Advisor." In other words, only an authorized advisor, who presumably is trained by her, is allowed to design a customized plan for the client.

Nor does Yellen publish a list of Bank on Yourself authorized advisors. In other words, the only way a client may access the Bank on Yourself plan is to contact Yellen, who will refer an authorized advisor to the client. Thus Yellen is operating what amounts to a closed system for accessing the Bank on Yourself plan.

The Lafayette Life Connection
Allan S. Roth is a certified financial planner and a certified public accountant. He has worked as a public accountant with KPMG, and has been with McKinsey & Company, Kaiser Permanente, and Wellpoint. Recently I saw an article by Roth entitled "Bestselling book's financial promises don't add up." On December 11, 2012, CBS News posted Roth's article, which was about Yellen's first book. Roth said in his article that he had met with a Yellen authorized advisor, who had made a presentation. Roth further said in his article that he had tried hard but had not been able to make sense of the numbers in the presentation. Roth said in his article that the authorized advisor's presentation had been based on a policy offered by The Lafayette Life Insurance Company, and that he (Roth) had been in touch with Lafayette Life about the presentation.

Mutual Holding Companies
Lafayette Life, which was established in 1905, is now part of Cincinnati-based Western & Southern Financial Group, a mutual holding company organization. I have written extensively about mutual holding companies. My first article on the subject, entitled "General American and the Mutual Holding Company Concept," was in the March 1997 issue of The Insurance Forum, the monthly newsletter I published from January 1974 through December 2013. Another article on the subject, entitled "Democracy at Provident Mutual—A Case Study in the Suppression of Communication among Policyowners," was in the May 1998 issue of the Forum. Both articles are in the complimentary package offered at the end of this post.

My Correspondence with Lafayette Life
On June 21, 2019, I sent a letter by regular mail to Bryan Chalmer Dunn, the president and chief executive officer of Lafayette Life. I asked several questions about the relationship between Yellen and Lafayette Life. I asked for a response by the close of business on June 28.

On June 27, I received a telephone call from Diane E. Planck, senior media relations specialist at Western & Southern, acknowledging receipt of the letter and asking for an extension. We agreed to extend the response date to the close of business on July 2. She graciously responded by email at the promised time. My letter and her email are shown later in this post.

Planck did not number her answers to correspond to my numbered questions. She did not answer the first question; I think the answer is yes, based on the previously mentioned Roth article. She answered the other questions directly or indirectly.

Planck's discussion of policy loan interest rates was helpful. She said the policy loan interest rate is variable, and is the larger of 5 percent or the "monthly average of the composite yield on seasoned corporate bonds" published by Moody's. I checked Moody's website and found that the averages were 4.08 percent for May 2019 and 3.89 percent for June 2019. Thus it appears that Lafayette Life's variable policy loan interest rate in those months was 5 percent.

Financial Strength
Lafayette Life's financial strength ratings as of September 18, 2018 were A+ (superior) from A. M. Best, AA– (very strong) from Standard & Poor's, and AA (very strong) from Fitch. For many years I published special ratings issues of the Forum. In the final years of the Forum, I deployed a system I had developed for using the ratings assigned by the major rating firms to classify life-health insurance companies, from the standpoint of financial strength, as suitable for "extremely conservative consumers" (category 1), for "very conservative consumers" (categories 1 and 2 combined), and for "conservative consumers" (categories 1, 2, and 3 combined). In the last of the special ratings issues—the September 2013 issue—I listed 19 companies for "extremely conservative consumers," 38 companies for "very conservative consumers," and 157 companies for "conservative consumers." Lafayette Life and two other Western & Southern companies were among the 38 companies for "very conservative consumers." Five pages of the 32-page September 2013 special ratings issue, including a description of the system and the names of the companies in each of the three categories, are in the complimentary package offered at the end of this post.

Text of June 21 Letter from Belth to Dunn
By way of introduction, I am professor emeritus of insurance in the Kelley School of Business at Indiana University (Bloomington). I am also a blogger at For further information, please click "Bio" on the home page of my blog site.

Pamela Yellen wrote a 2016 book entitled The Bank on Yourself Revolution. She also wrote a 2009 book entitled Bank on Yourself. This letter relates to the 2016 book.

Ms. Yellen says on page 255 that there are only a handful of life insurance companies that meet the requirements needed to maximize the power of her Bank on Yourself concept. She does not identify the companies, but I saw an article on CBS News indicating that Lafayette Life is one of the companies. I am working on a blog post about her system, and have a few questions for you.
  1. Are you familiar with Ms. Yellen's book?
  2. Ms. Yellen says on pages 255-257 that the recommended companies issue a participating whole life policy with a paid-up additions rider and do not use direct recognition. Do you offer such a policy?
  3. Ms. Yellen does not mention the nature of the policy loan clause. What is your policy loan interest rate, and is it a fixed rate or a variable rate? If it is a variable rate, what is the maximum rate?
  4. Ms. Yellen says the recommended companies must have high ratings from several independent rating agencies. What are your current ratings by A. M. Best, Standard & Poor's, Moody's Investors Service, and Fitch?
  5. Ms. Yellen says on page 250 that there are about 200 authorized advisors across the U.S. and Canada. She does not identify them, but a person interested in her system may contact her, and she will refer an authorized advisor to that person. Are you aware of any of your agents who are authorized advisors for her system? If so, how many are you aware of?
  6. If your answer to the first part of (5) is yes, do you approve of their use of Ms. Yellen's system?
I need your reply to this letter by the close of business on Friday, June 28. Please send your reply by email to [my personal email address]. If you would like to speak with me, my direct telephone number is 000-000-0000, and I am on Eastern time. Thank you for your assistance.

Text of July 2 Email from Planck to Belth
Thank you again for contacting Lafayette Life concerning your upcoming blog. We share your passion for the life insurance industry and the important role insurance carriers have in providing products that help people with their financial security.

Information on our most current financial strength ratings (Lafayette is not rated by Moody's) and products (and if they are dividend paying) is available in detail at Lafayette Life's website.

The Lafayette Life Insurance Company is committed to offering people in the markets we serve a wide range of life insurance and annuity products to help meet their growing and increasingly diverse set of financial needs. Our product offerings include a dividend-paying whole life policy with a paid-up additions rider. All dividend-paying whole life policies from Lafayette Life are non-direct recognition, which means the dividend credited to the policy will be the same whether there is a loan or not. The loan interest we charge is the greater of 5% or the monthly average of the composite yield on seasoned corporate bonds as published by Moody's Investors Service, Inc., or any successor to that service.

Lafayette Life's products are sold through independent agents and independent marketing organizations. Our role is limited to providing life insurance policies and annuity contracts. We do not endorse or sponsor any selling system nor do we develop, advertise or promote the marketing content or materials for any selling system. We do not inquire about, attempt to determine, or identify in our systems whether any independent agents appointed to sell our products are users of any specific selling system.

Please be assured that Lafayette Life makes it clear through our contracts with those selling our products and disclosures to our customers that our life insurance policies and annuity contracts are insurance products.

I believe this addresses the questions you raised. Please let me know if you need anything else.

General Observations
Lafayette Life appears to take no interest in or responsibility for the methods used by the independent agents who sell its policies. Further, I think the same can be said about many if not all other companies that sell their policies through independent agents. In my opinion, this is a matter of serious concern, for two reasons. First, sales methods may be deceptive, misleading, or otherwise unfair to consumers. Second, companies and state insurance regulators may find it difficult to police the sales methods used in the field by independent agents.

I was not able to find anywhere in Yellen's book a detailed description of her Bank on Yourself system. I think, but cannot be certain, that she recommends clients purchase automobiles and make other major expenditures by taking out loans against life insurance policies and later repaying the policy loans. I think she is saying the procedure will build the client's wealth far more rapidly and safely than any other conceivable system. I do not believe it. Until such time as she illustrates the numbers in detail, I will continue refusing to believe it.

Available Material
I am offering a complimentary 19-page PDF consisting of an article in the March 1997 issue of the Forum (6 pages), an article in the May 1998 issue (8 pages), and an excerpt from the September 2013 issue (5 pages). Email and ask for the July 2019 package about the Yellen system.


Tuesday, July 9, 2019

No. 321: TIAA Is Exiting the Life Insurance Business

On June 26, 2019, Investment News carried an article by reporter Greg Iacurci disclosing that Teachers Insurance and Annuity Association of America (TIAA) is exiting the life insurance business at the end of 2019. The article quotes an industry observer as saying: "Part of the reason they're getting out is because they're not selling enough." Here I discuss this important development.

TIAA's Comments
The Iacurci article alludes to a June 25 memorandum from Dennis Rupp, TIAA's director of insurance wholesaling. I asked the TIAA media office for the Rupp memorandum, but did not receive it. Instead, I received a June 28 letter from Todd Sagmoe, TIAA's vice president of product management. He said:
Thank you for your inquiry into the recent TIAA decision to stop issuing new life insurance contracts. I can confirm that TIAA will no longer underwrite and issue new life insurance contracts. Here is the public response that TIAA has prepared: "While life insurance is a key component of our holistic approach to financial wellness, we have decided to stop underwriting new life insurance policies. To enhance our operational efficiency, we will offer a variety of solutions from other carefully selected providers to meet our customers' life insurance needs. We will maintain and continue to service existing policies to ensure a high-quality customer experience."
The Examination Reports
TIAA and its subsidiary, TIAA-CREF Life Insurance Company, are domiciled in New York. The most recent examination reports of the two companies by the New York State Department of Financial Services are as of December 31, 2013, and are dated June 10, 2015. The TIAA report says it "ceased issuing life insurance policies in 2005." However, I think TIAA-CREF Life continued issuing life insurance policies. Selected pages of the two examination reports are in the complimentary package offered at the end of this post.

The Life Insurance Price Issue
Long-time readers know that I conducted many studies of the price of life insurance protection from the viewpoint of the policyholder, and that I recommended a system for disclosing the information to consumers. Because of strong opposition from the life insurance business, my recommended disclosure system was not adopted. I described the system in an article entitled "Information Disclosure to the Life Insurance Consumer" in the December 1975 issue of the Drake Law Review. The article is in the complimentary package offered at the end of this post.

In the course of my research in the 1960s and 1970s, I became aware of a "lifetime" (whole life) policy issued by TIAA in 1965 to a man aged 35. The policy included the usual premium provision, fractional premium options, grace period and reinstatement clauses, a table of cash values, reduced paid-up insurance and extended term insurance, a loan clause with a fixed annual interest rate of 5 percent, an automatic premium loan clause, an ownership clause, an entire contract clause, two-year incontestability and suicide clauses, a reserve provision based on the 1958 C.S.O. mortality table and 2.5 percent interest, beneficiary provisions, settlement options, and a waiver-of-premium clause. The policy was "non-participating," but TIAA mailed to the policyholder each year a check representing a "voluntary dividend." No dividend options were available other than the cash option.

When I examined the price structure of the policy, I found that the price of the life insurance protection from the viewpoint of the policyholder, including the effect of the "voluntary dividends," was well below the price of the life insurance protection in any other policy I had seen. One explanation may have been that TIAA employed no agents, and instead sold directly to its narrow constituency—the faculty and senior administrative staff of colleges and universities. Another explanation may have been TIAA's reportedly stringent underwriting practices.

The LTC Insurance Incident
In November 2003, TIAA notified its then 46,000 long-term care (LTC) insurance policyholders that it was exiting the LTC insurance business and transferring its LTC insurance policyholders to Metropolitan Life Insurance Company. Because both companies were domiciled in New York, the transfer was subject to the approval of the person who is now the superintendent of financial services. On February 3, 2004, I submitted to the superintendent a "Statement of Joseph M. Belth on TIAA Transfer to MetLife" showing, among other things, five matters that should be conditions for approval of the transfer.

The LTC insurance incident led to three major articles in The Insurance Forum, my monthly newsletter. The first article, which was in the March/April 2004 issue, was entitled "TIAA's Surprising Exit from the Long-Term Care Insurance Business." The article included my statement to the superintendent, and is in the complimentary package offered at the end of this post.

General Observations
When TIAA exited the LTC insurance business in 2003 and sought to transfer its obligations to another insurance company, I had been writing since 1989 about the widespread practice of insurance companies seeking to shed their obligations to their policyholders.  I had deep respect for TIAA, and was disappointed to see it engage in that anti-policyholder activity.  Many of my academic colleagues felt the same way.

I interpret the Sagmoe letter as saying TIAA will not attempt to transfer its life insurance obligations to another company. Instead, I think TIAA will honor its obligations to its life insurance policyholders, and will run off its existing life insurance policies over many years. If my interpretation is incorrect, and TIAA moves to transfer its life insurance obligations to another company, I will report developments.

Available Material
I am offering a complimentary 51-page PDF consisting of selected pages from the latest TIAA and TIAA-CREF Life examination reports (21 pages), the 1975 Drake Law Review article (26 pages), and the March/April 2004 Forum article (4 pages). Email and ask for the July 2019 package about TIAA.


Monday, July 1, 2019

No. 320: Greg Lindberg—The North Carolina Department of Insurance Places Four of His Companies in Rehabilitation

On Thursday, June 27, 2019, four documents relating to Greg Lindberg's insurance companies were filed in a state court in North Carolina. The documents, which are in the complimentary package offered at the end of this post, were filed between 1:17 and 1:48 that afternoon. At 2:48, reporters Leslie Scism and Mark Maremont of The Wall Street Journal posted an article entitled "North Carolina Regulators Seize Control of Life Insurers Owned by Greg Lindberg." They posted an updated version at 6:17. Here I discuss the developments and mention briefly what is happening in a related federal criminal case.

The Verified Petition
One state court document is a "Verified Petition for an Order of Rehabilitation, and Order Appointing Receiver, and Injunctive Relief." The petitioner is Mike Causey, the North Carolina commissioner of insurance. The respondents are Southland National Insurance Corporation, Southland National Reinsurance Corporation, Bankers Life Insurance Company, and Colorado Bankers Life Insurance Company. The respondents are licensed in North Carolina, their principal place of business is in Durham, North Carolina, and Lindberg is the controlling shareholder.

The petition says the commissioner was concerned about the respondents' liquidity. On October 18, 2018, the commissioner and the respondents entered into a consent order for administrative supervision for 120 days. On February 5, 2019, they entered into an amended consent order for administrative supervision for an additional 120 days. On April 4, 2019, they entered into a second amended consent order for administrative supervision, and agreed that appointment of a receiver was necessary for the protection of the respondents' policyholders. The commissioner asked the court to enter an order of rehabilitation naming him the rehabilitator.

The Rehabilitation Order
Another state court document is an "Order of Rehabilitation, Order Appointing Receiver, and Order Granting Injunctive Relief." Senior Resident Wake County Court Judge Paul Ridgeway appointed the commissioner as the rehabilitator and the receiver, issued an injunction against interference with the rehabilitation, and required the rehabilitator to provide quarterly reports to the court.

The Moratorium Motion
Another state court document is a "Motion for Moratorium on Policy Surrenders and Other Relief." The North Carolina attorney general's office asked the court to issue an order granting a moratorium on cash surrenders, annuitizations, and policy loans, and ordering development of a plan for policyholders with legitimate hardship claims.

The Moratorium Order
Another state court document is an "Order Granting Motion for Moratorium on Policy Surrenders and Other Relief." Judge Ridgeway granted the motion and ordered the rehabilitator to adopt a moratorium and implement a policy for legitimate hardship claims.

Secrecy of the Consent Orders
When I asked the North Carolina Department of Insurance for the state court documents, a spokesperson provided them promptly. When I saw them, I requested the three consent orders referred to in the verified petition. The spokesperson said the consent orders are confidential pursuant to Section 58-30-70 of the North Carolina General Statutes. That section reads:
Confidentiality of hearings. In all proceedings and judicial reviews thereof under G.S. 58-30-60 and G.S. 58-30-65, all records of the insurer, other documents, and all Department files and Court records and papers, insofar as they pertain to or are part of the records of the proceedings, shall be and remain confidential except as necessary to obtain compliance therewith, unless the Court, after hearing arguments from the parties in chambers, orders otherwise; or unless the insurer requests that the matter be made public. Until such Court order, all papers filed with the clerk of the Court shall be held by him in a confidential file.
The section does not mention consent orders, and I do not recall any consent order being deemed confidential. I do not plan to appeal the denial. However, I would welcome comments from readers with legal experience in freedom-of-information matters.

The Federal Criminal Case
In No. 309 (April 17, 2019), I posted an item about a federal grand jury indictment of Greg Lindberg and three others for criminal wrongdoing. On April 2, the court unsealed the indictment. On April 3, a docket call was set for July 1. On May 2, the docket call was reset to July 15. Initially the case was assigned to District Judge Max O. Cogburn, Jr. On June 17, the case was reassigned to District Judge Kenneth D. Bell. On June 27, the case was reassigned back to Judge Cogburn and the docket call was reset to September 16. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

General Observations
I plan to follow developments in the rehabilitation proceedings related to Lindberg's insurance companies, and in the proceedings related to the federal criminal case against Lindberg and three others. I anticipate that the proceedings will be lengthy.

Available Material
I am offering a complimentary 46-page PDF consisting of the verified petition (25 pages), the rehabilitation order (9 pages), the moratorium motion (7 pages), and the moratorium order (5 pages). Email and ask for the July 2019 Lindberg package.


Tuesday, June 25, 2019

No. 319: David McCullough—His New Book and a Connection with the History of American Life Insurance

David McCullough, now aged 85, is one of my favorite authors. I have read all of his books, and each is a treasure. Here I discuss his latest book. It is entitled The Pioneers: The Heroic Story of the Settlers Who Brought the American Ideal West. I also discuss a connection with R. Carlyle Buley, an Indiana University history professor who wrote extensively not only about the American pioneer period but also about the history of American life insurance.

McCullough's New Book
In his new book, McCullough begins with the 1783 Paris peace treaty that ended the Revolutionary War. John Adams and John Jay insisted that all the British land west of the Alleghenies and northwest of the Ohio River and east of the Mississippi River should be ceded to the new United States. The British reluctantly agreed, and the U.S. thus doubled its size by adding a huge amount of wilderness that eventually became Ohio, Indiana, Illinois, Michigan, Wisconsin, and eastern Minnesota.

Among the New Englanders who promoted the idea of settling the new territory were Manasseh Cutler, a churchman who had served as an army chaplain during the Revolutionary War, and Rufus Putnam, who had been a general in the War. George Washington also liked the idea.

In 1787, before a national constitution had yet been adopted, Congress approved the famous Northwest Ordinance. It provided for freedom of religion and emphasized the importance of education. But the most controversial section abolished slavery forever in the huge new territory. Thus eleven years after the Declaration of Independence and 73 years before the Civil War, the New Englanders who planned to settle the huge Northwest territory forever abolished slavery there. McCullough describes in detail how they accomplished the feat. Here is a small portion of that description (on pages 29-30):
But it was Article VI that set forth a tenet such as never before stated in any American constitution. "There shall be neither slavery nor involuntary servitude in the said territory." And, as was well understood, this had been agreed to when slavery existed in every one of the thirteen states. It was almost unimaginable that throughout a new territory as large as all of the thirteen states, there was to be no slavery....
Overall Manasseh Cutler had played the most important role by far. Years later he would tell [his son] Ephraim he had indeed prepared that part of the ordinance banning slavery and, as Ephraim also recorded, the reason for this, as well as the recognition of religion, morality, and knowledge as foundations of civil government, arose from the fact that his father was "acting for associates, friends, and neighbors, who would not embark in the enterprise, unless these principles were unalterably fixed."
In the opinion of [Manasseh's] two grandchildren, William Parker Cutler and Julia Perkins Cutler, who would later edit and publish Manasseh Cutler's journals and correspondence, his way with the southern members of Congress had been the deciding factor.
In any event, the Northwest Ordinance of 1787 would prove to be one of the most far-reaching acts of Congress in the history of the country.
As one widely respected, later-day historian, Albert Bushnell Hart of Harvard University, would write, "Never was there a more ingenious, systematic and successful piece of lobbying than that of the Reverend Manasseh Cutler" and the great Northwest Ordinance of 1787 stands alongside the Magna Carta and the Declaration of Independence as a bold assertion of the rights of the individual.
McCullough focuses primarily on the settling of Ohio, particularly in the area around Marietta. Although he writes little about the developments in the other states of the Old Northwest, his book is fascinating.

McCullough's Earlier Books
The Pioneers is McCullough's twelfth book. Here, listed chronologically, are his earlier books.
  1. The Johnstown Flood: The Incredible Story Behind One of the Most Devastating Disasters America Has Ever Known (1968)
  2. The Great Bridge: The Epic Story of the Building of the Brooklyn Bridge (1972)
  3. The Path Between the Seas: The Creation of the Panama Canal, 1870-1914 (1977)
  4. Mornings on Horseback (1981), about the young Theodore Roosevelt
  5. Brave Companions: Portraits in History (1991), about several prominent American historical figures
  6. Truman (1992), for which he received a 1993 Pulitzer Prize
  7. John Adams (2001), for which he received a 2002 Pulitzer Prize
  8. 1776 (2005)
  9. The Greater Journey: Americans in Paris (2011), about American writers, poets, artists, sculptors, composers, and others who drew inspiration from the time they spent in Paris during the 19th century
  10. The Wright Brothers (2015)
  11. The American Spirit: Who We Are and What We Stand For (2017)
McCullough has received many awards in addition to the two Pulitzer Prizes mentioned above. He has received two National Book Awards, two Francis Parkman Prizes, a Presidential Medal of Freedom, many other awards, and dozens of honorary degrees.

R. Carlyle Buley
R. Carlyle Buley (1893-1968) served for many years as professor of history at Indiana University (IU) in Bloomington. He was the author of a two-volume work entitled The Old Northwest: Pioneer Period 1815-1840. It was published in 1950, and for it he received a 1951 Pulitzer Prize. His book is in McCullough's bibliography, and it is cited in a few notes. Unlike McCullough, Buley goes into detail about developments not only in Ohio but also in the other states of the Old Northwest.

I knew about Buley even before I arrived at IU in 1962. I had read his two major treatises about the history of life insurance in America. His first two-volume book about life insurance is entitled The American Life Convention 1906-1952: Study in the History of Life Insurance. It was published in 1953. The Convention was a life insurance company trade association that no longer exists. Almost 20 years ago it merged with what is now The American Council of Life Insurers. Buley wrote about the history of life insurance in America through a history of the Convention. For the book he received an Elizur Wright Award in recognition of "outstanding contribution to the literature of insurance."

Buley's second two-volume book about life insurance is entitled The Equitable Life Assurance Society of the United States 1859-1964. It was published in 1967. Most histories of life insurance companies are written in glowing language and serve as sales pieces that promote the companies. Buley's history of Equitable, however, is written "warts and all." Today, Equitable no longer exists. It was bailed out of financial trouble about 30 years ago by a French company (AXA), and became AXA Equitable Life.

As an illustration of Buley's writing style, here are excerpts from pages 208-209 in the first volume of The American Life Convention, where he described the lead up to the famous Hughes-Armstrong Investigation of 1905. The "unsavory mess" to which he referred was a combination of the prominent struggle for control of Equitable and the rapid growth of deferred dividend (or "semi-tontine") policies.
One conclusion was fairly general: That the whole unsavory mess would not be in vain if from the odor should arise a better popular understanding of the deferred dividend system which had done so much to increase the expense of life insurance and so little to increase the value of a life insurance policy... What critics of the deferred dividend system apparently did not recognize was that part of the difficulty arose from the inadequacy of accounting procedures, which permitted accumulated deferred dividends to be carried as surplus instead of as a reserve which the companies should have been required to maintain against the deferred dividend policies.
One prominent voice, however, was raised in public defense of the deferred dividend system. Thomas A. Buckner, vice president of the New York Life, reviewed the history of the deferred dividend practice and pointed to the figures which indicated the people's choice: the Connecticut Mutual in 1869 had $177 million of life insurance in force, in 1904 it had $167 million; in 1869 the New York Life had $102 million in force, in 1904 it had $1.9 billion.
Also it was thought that the flood of publicity would not only educate the public as to the nature of life insurance but that it would enlarge the perspective of life insurance men in general and help fix the status of life insurance in the social and economic life of the country. The foreseeable result would be the triumph of conservatism, sanity, honesty, and justice, a return to the creed of old-fashioned honesty as stated by Jacob L. Greene [of Connecticut Mutual], Amzi Dodd [of Mutual Benefit Life], and others of their school, men who believed that the life insurance companies should be operated for the benefit of the policyholders rather than that of the officers.
Six years before Buley died, I arrived in Bloomington to begin my academic career at IU. Although I already knew a lot about him, I regret to say I never met him.


Tuesday, June 18, 2019

No. 318: Factoring Companies—A California Lawsuit and a Texas Order Focus Attention on the Sale of Income Streams

A recent state court lawsuit in California and a recent disciplinary order in Texas have refocused attention on the questionable business of factoring companies, which acquire and resell income streams from pensions and annuities. Here I discuss the lawsuit and the order, and present the views of securities regulators on the subject.

The California Lawsuit
DRB Capital is a Delaware LLC based in Florida. Its website ( provides some information. DRB offers cash for structured settlements, annuities, and "pre-settlement funding." The site does not disclose the names of the DRB officers. However, it is clear that DRB is a factoring company in the business of reselling, perhaps to clients of insurance agents and financial advisers, streams of income that DRB acquires through assignments from payees of structured settlement annuities and retirement annuities.

On November 13, 2018, DRB filed a lawsuit against Robert Perez (a California resident), New York Life Insurance Company, and New York Life Insurance and Annuity Corporation (NYLIAC). Perez is the payee of an individual retirement annuity (IRA) he inherited. Under a proposed assignment, Perez was to receive from DRB a lump sum in exchange for assigning to DRB 89 monthly IRA payments of $683.57 each beginning January 22, 2020 and ending May 22, 2027. The payments amount to a simple total of $60,837.73.

The complaint did not include a a copy of the IRA.  Nor did it include a copy of the proposed assignment agreement between DRB and Perez. The complaint named both New York Life and NYLIAC as defendants, but NYLIAC issued the IRA. The complaint did not disclose the size of the lump sum DRB was to pay Perez in exchange for the assignment of the 89 IRA payments. Therefore, when the lump sum is viewed as a loan by DRB to Perez (which is precisely what it is), it is impossible to calculate the annual interest rate on the loan. DRB said NYLIAC will not honor the assignment of the payments without a court order. Thus DRB sought a court order declaring the assignment valid and enforceable.

On January 23, 2019, NYLIAC responded to the DRB complaint in a "demurrer." NYLIAC said New York Life was not the issuer of the IRA and therefore was not a proper party in the case. NYLIAC said "the express anti-assignment language in the annuity contract ... bars the relief requested by DRB in the Complaint." NYLIAC said "the relief requested by DRB in the Complaint is barred because it would contravene Section 408 of the Internal Revenue Code and materially increase the burdens and risks of both Mr. Perez and NYLIAC." NYLIAC asked the court to sustain the demurrer without leave to amend.

On May 31, 2019, California Superior Court Judge Kenneth J. Medel issued an order sustaining NYLIAC's demurrer without leave to amend. He also ordered New York Life removed from the case. The DRB complaint, the NYLIAC demurrer, and the court order are in the complimentary package offered at the end of this post. (See DRB v. Perez, Superior Court of California, County of San Diego, Case No. 37-2018-00057432-CU-MC-CTL.)

The Texas Disciplinary Order
On June 6, 2019, Texas Securities Commissioner Travis J. Iles issued a disciplinary order directed at an individual and a firm in Dallas who had sold stream-of-income investments to clients. Commissioner Iles reprimanded the individual and the firm. He also directed them to pay almost $89,000 (twice the commissions they had received) to certain clients. The Texas order is in the complimentary package offered at the end of this post.

The Warnings from Securities Regulators
In May 2013, the Office of Investor Education and Advocacy of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) jointly issued an "Investor Bulletin" entitled "Pension or Settlement Streams." The bulletin is mandatory reading for anyone considering a sale of or an investment in a pension stream. Here are the first two paragraphs of the bulletin:
Do you receive a monthly pension from a former employer? Are you getting regular distributions from a settlement following a personal injury lawsuit? If so, you may be targeted by salespeople offering you a lump sum today to buy the rights to some or all of the payments you would otherwise receive in the future. Retired government employees and retired members of the military are among those being approached with such offers. Typically the lump sum offered will be less—sometimes much less—than the total of the periodic payments you would otherwise receive.
After acquiring the rights to a future income stream (such as a retiree's pension payments), these pension purchasing or structured settlement companies, sometimes called "factoring companies," may turn around and sell these income streams to retail investors, often through a financial adviser, broker or insurance agent. These products go by various names—pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities. They may be pitched to investors with words like "guaranteed" and "safe"—and may tout robust returns that outpace more traditionally conservative investments such as CDs or money market accounts. The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex. FINRA and the SEC's Office of Investor Education and Advocacy are issuing this Investor Alert to inform anyone considering selling their rights to an income stream—or investing in someone else's income stream—of the risks involved and to urge investors to proceed with caution.
The North American Securities Administrators Association (NASAA) is an organization of state, district, and territory securities regulators in the U.S. and Mexico, and provincial securities regulators in Canada. On April 4, 2016, NASAA issued an "Informed Investor Advisory: Pension Advance Scams." The advisory explains how the "scam" works. The "bottom line" says: "Before making any decisions with your money, ask questions, do your homework and contact your state or provincial securities regulator."

On April 5, 2016, the day after NASAA issued its advisory, the Texas State Securities Board issued an "Investor Alert." It is entitled "Pitfalls of Pension Advance Schemes." The SEC/FINRA bulletin, the NASAA advisory, and the Texas alert are in the complimentary package offered at the end of this post.

My Writings About Factoring Companies
I wrote articles about factoring companies in the August 2011 and October 2011 issues of The Insurance Forum, my monthly newsletter. There I discussed the activities of such companies in detail, including the high annual interest rates associated with factoring transactions. The articles are in the complimentary package offered at the end of this post.

I also posted two blog items on the subject: No. 115 (September 11, 2015) and No. 190 (November 28, 2016). More recently, I posted No. 293 (November 1, 2018) about a tragic situation in which one element of the case involved the assignment of a portion of the proceeds from a structured settlement annuity.

General Observations
In the October 2011 Forum article mentioned above, I expressed the opinion that regulation of the secondary market for structured settlement annuities and retirement annuities did not exist. I referred to the situation as a "regulatory vacuum." What federal, state, and provincial securities regulators have been doing more recently is encouraging, but I think regulatory attention in this area remains inadequate.

Available Material
I am offering a complimentary 40-page PDF consisting of the DRB complaint (3 pages), the NYLIAC demurrer (13 pages), the California court order (2 pages), the Texas disciplinary order (9 pages), the SEC/FINRA bulletin (4 pages), the NASAA advisory (2 pages), the Texas alert (2 pages), and the two Forum articles (5 pages). Email and ask for the June 2019 package about factoring companies.


Thursday, June 13, 2019

No. 317: Stranger Originated Life Insurance and the New Jersey Supreme Court

On June 4, 2019, the New Jersey Supreme Court handed down a 6 to 0 opinion that represents a major setback for stranger originated life insurance (STOLI). The opinion is "on certification of questions of law from the U.S. Court of Appeals for the Third Circuit," and draws on facts from the opinions of the Third Circuit and the U.S. District Court for the District of New Jersey. Chief Justice Stuart Rabner wrote the opinion. Justices Jaynee LaVecchia, Anne M. Patterson, Faustino J. Fernandez-Vina, Lee A. Solomon, and Walter F. Timpone joined in the opinion. Justice Barry T. Albin did not participate. The "syllabus" and the full opinion are in the complimentary package offered at the end of this post. (See Sun Life of Canada v. Wells Fargo Bank, Supreme Court of New Jersey, A-49 September Term 2017, 080669.)

Facts of the Case
The facts of the case resemble those of many cases issued during the heyday of STOLI. The application was for a $5 million policy. The application vastly overstated the insured's income and assets, and a phony inspection report verified the false information. Also, the application substantially understated the amount of life insurance already in force on the insured's life. The application named a trust as the sole owner and beneficiary of the policy. The insured's grandson signed the application as trustee. Sun Life issued the policy in July 2007. Five weeks later, the grandson resigned as trustee and appointed certain "investors," or what I call "speculators in human life," as successor co-trustees. The trust agreement was amended so that most of the benefits would go to the investors, who were also empowered to sell the policy. More than two years later, after expiration of the two-year period of contestability, the trust sold the policy. The investors received nearly all the proceeds from the sale. Wells Fargo Bank eventually acquired the policy in a bankruptcy settlement and continued to pay the premiums.

The insured died in 2014. Wells Fargo sought to collect the death benefit. Sun Life investigated, discovered the fraud, refused to pay, and sought a declaratory judgment that the policy was void ab initio (from the beginning). Wells Fargo counterclaimed for breach of contract and, if the court voided the policy, sought a refund of the premiums it had paid.

Federal District Court Ruling
The federal district court in New Jersey found that New Jersey law applied, that it was a STOLI transaction lacking insurable interest in violation of the state's public policy, and declared the policy void ab initio. The court also granted Wells Fargo a refund of the premiums it had paid, reasoning that Wells Fargo was not to blame for the fraud, and that allowing Sun Life to retain the premiums would provide a windfall to Sun Life.

Third Circuit Ruling
Both parties appealed to the federal Third Circuit. Finding no dispositive New Jersey case law, the Third Circuit certified two questions of law to the New Jersey Supreme Court. Here are the questions:
  1. Does a life insurance policy that is procured with the intent to benefit persons without an insurable interest in the life of the insured violate the public policy of New Jersey, and if so, is that policy void ab initio?
  2. If such a policy is void ab initio, is a later purchaser of the policy, who was not involved in the illegal conduct, entitled to a refund of any premium payments that they made on the policy?
New Jersey Supreme Court Ruling
The New Jersey Supreme Court answered yes to both parts of the first certified question. In other words, a life insurance policy procured with the intent to benefit persons who do not have an insurable interest in the life of the insured violates the public policy of New Jersey, and such a policy is void ab initio.

On the second certified question, the court ruled that a party may be entitled to a refund of premiums it paid on the policy, "depending on the circumstances." To decide the appropriate remedy, the court ruled that trial courts should develop a record and balance the relevant equitable factors, such as a party's level of culpability, its participation in or knowledge of the fraud, and its failure to notice red flags. A party may be entitled to a refund of premiums it paid, particularly a later purchaser who was not involved in the fraudulent conduct. The court noted that the district court had considered equitable principles and had fashioned a compromise award, but had not commented on the award.

Earlier STOLI Cases
My first article about the secondary market for life insurance was in the March 1989 issue of The Insurance Forum. My second article was in the March 1999 issue of the Forum, and was prompted by my first evidence of what later became known as STOLI. The articles are in the complimentary package offered at the end of this post.

I have also written extensively about STOLI on my blog. Four such posts, in chronological order, are No. 131 (12/9/15), No. 166 (6/15/16), No. 167 (6/20/16), and No. 228 (8/1/17).

General Observations
I think major life insurance companies have instituted sufficient safeguards to prevent significant amounts of new STOLI business from being initiated. The problem now is the handling of the huge volume of STOLI business that was initiated during the heyday of STOLI and is now moving around among a shrinking number of investors. I think the STOLI business will continue to generate litigation for many years.

Available Material
I am offering a complimentary 69-page PDF consisting of the syllabus and full New Jersey Supreme Court opinion (53 pages), and the articles about the secondary market in the March 1989 and March 1999 issues of the Forum (16 pages). Email and ask for the June 2019 package about STOLI.


Monday, June 10, 2019

No. 316: John F. X. Mannion—A Memorial Tribute

John F. X. Mannion
John F. X. "Jack" Mannion, of Syracuse, New York, died on May 25, 2019, at age 86. He served for many years as Chairman and Chief Executive Officer of Unity Mutual Life Insurance Company, which was based in Syracuse.

Jack was born in the Bronx on December 6, 1932, during the Great Depression. He graduated at the top of his class at All Hollows High School. He then attended the University of Notre Dame, where he enrolled in the Air Force ROTC program. He was a lifelong supporter of both All Hollows and Notre Dame. He served in the U.S. Air Force during the Korean War. After his discharge with the rank of captain, he started his insurance career as an agent. Jack's wife, Stephanie Miner, served as Mayor of Syracuse from 2010 to 2018.

Although Jack and I were fellow Syracusans, we never met face to face. I left Syracuse in 1958 and returned only for personal family visits and later for the 50th reunion of my high school class. However, Jack and I became good friends not long after I started publishing The Insurance Forum, my monthly newsletter. Whenever he saw an article there that intrigued him, he would write or call to talk about it. I always enjoyed our discussions because they helped me understand the viewpoint of a prominent practitioner in the business.

My favorite personal story about Jack was a letter from him not long after we became acquainted. He told me that, whenever he received an envelope showing my return address, he would open it with trepidation. He explained he was fearful that I was considering an article critical of his company. I assured him that, if I ever considered an article about his company, critical or not, he would hear about it from me in advance and by telephone rather than by letter.

Our final exchange was less than a year ago, when Jack sent me an email commending me on a particular item I had just posted on my blog.  I thanked him and said his kind words meant a lot to me.

Jack was a wonderful person, a strong supporter of my work, and a good friend. I will miss him greatly.