The Office of General Counsel issued the following opinion on April 11, 2006, representing the position of the New York State Insurance Department.
Re: Execution of 1035 Exchange by a Former Life Insurance Agent.
May a former New York life insurance agent execute an exchange of an annuity on his own life pursuant to Internal Revenue Code § 1035 and receive a commission for executing the transaction?
A former New York life insurance agent may execute such a transaction, provided that the insurer allows direct placements. However, the insurer may not pay the former insurance agent a commission or any other compensation for executing the exchange, since the agent is not currently licensed as an insurance agent or broker.
The inquirer was licensed as an insurance agent in New York for about twenty years. In 1985, while he was licensed as an insurance agent, he purchased for himself a fixed annuity contract from ABC Life Insurance Company ("the insurer"). Ten years ago, when he turned seventy years old, he retired and did not renew his insurance agent's license. The insurer has informed him that his annuity contract is very old and the earnings are not up to current annuity rates and should be exchanged for an up-to-date earnings rate annuity contract that pays a fixed rate of 1.5% more for a five year period. The terms of the new annuity will be the same except for the higher fixed earnings rate.
However, the insurer states that the inquirer may not execute this exchange since his insurance agent's license is no longer in force and he must use a licensed life insurance agent or broker to effectuate the transaction. The inquirer believes that this is unfair because this would be rewarding a stranger to the transaction whose only effort is to sign a commission check.
N.Y. Ins. Law § 2102(a)(1) (McKinney Supp. 2006) prohibits any person, firm, association or corporation from acting as an insurance producer or insurance adjuster in this state without having the authority to do so by virtue of a license issued and in force pursuant to the provisions of Article 21 of the Insurance Law.
N.Y. Ins. Law 2101(k) (McKinney Supp. 2006) defines the term "insurance producer" as "any insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance."
N.Y. Ins. Law § 2101(a)(McKinney Supp. 2006) defines the term "insurance agent" as:
(a) [A]ny authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or sale of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker . . . (emphasis supplied)
N.Y. Ins. Law § 2101(c) (McKinney Supp. 2006) defines the term "insurance broker" as:
[A]ny person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker . . . (emphasis supplied)
Thus, any person who is not licensed as an insurance agent or broker, or exempted from licensing, is precluded from engaging in the sale, solicitation and negotiation of insurance. The execution of the exchange pursuant to Section 1035 of the Internal Revenue Code necessarily involves the sale of insurance, since a new annuity is being purchased to replace the existing annuity.1
However, the inquirer stated that he would be executing the exchange on his own behalf. Section 2101(c) would allow him to do so without a license, since such activity is not considered to be acting as an insurance broker. Thus, provided that the insurer permits direct placements, he may execute the exchange on his own behalf. The insurer may not, however, pay him a commission or any other compensation for executing the exchange.
N.Y. Ins. Law § 2114(a)(1) (McKinney Supp. 2006), which applies to life, accident and health insurance, prohibits any insurer, agent or any other representative from, inter alia, paying any commission or other compensation to any person, firm, association or corporation for any services in obtaining in this state any new annuity contract, except to a licensed life insurance agent of such insurer or a licensed insurance broker or a person described in Section 2101(a)(2) or 2101(a)(3), which exceptions do not apply to his inquiry. Thus, the insurer may not pay the inquirer a commission or any other compensation for executing the exchange, since he is not currently licensed as an insurance agent or broker.
Moreover, N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006), which applies to life, accident and health insurance states:
(c) No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
Section 4224(c) prohibits, inter alia, insurers from providing, or offering to provide a rebate from the premium or other valuable consideration that is not specified in the annuity contract. The statute also prohibits any insured from knowingly receiving a rebate from the premium, policy fee or valuable consideration that is not specified in the annuity contract. Here, if the insurer paid the inquirer a commission, it would constitute a rebate in violation of Section 4224, since the insurer would, in effect, be returning a portion of the premium to him.
Lastly, the inquirer stated that the fact that he does not have a current license will not deprive the State of any revenue because he is a Pacific Theater combat veteran of World War II and served for three years. Section 2103(j)(11), which applies to insurance agents, provides that "No license fee shall be required of any person who served as a member of the armed forces of the United States at any time, and who shall have been discharged, under conditions other than dishonorable, in a current licensing period, for the duration of such period." Section 2104(f)(2), which applies to insurance brokers, contains an identical provision.
These provisions allow a fee waiver for a person who serves in the armed forces of the United States and is discharged, and then seeks to be licensed for the remainder of an ongoing licensing period that began before such person was discharged. It does not appear from the facts that the inquirer presented that he would qualify for this fee waiver, since he was discharged over sixty years ago. Moreover, no other requirement is waived and he would have to otherwise qualify, including having all education prerequisites.
This opinion is strictly limited to an interpretation of the New York Insurance Law and does not address the tax treatment of exchanges of annuity contracts pursuant to Internal Revenue Code § 1035, as this is outside of the Department's jurisdiction.
For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.
1 N.Y. Comp. Codes R. & Regs. tit. 11, § 51.2 (Regulation 60) (stating, in relevant part, that "the term replacement of a life insurance policy or annuity contract . . . means, except as exempted in section 51.3 of this part, that new life insurance or new annuities are to be purchased and delivered or issued for delivery in New York and it is known to the department licensee that, as part of the transaction, existing life insurance policies or annuity contracts have been or are likely to be: 1) lapsed, surrendered, partially surrendered, forfeited, assigned to the insurer replacing the life insurance policy or annuity contract or otherwise terminated . . .") The Department has previously opined that 1035 exchanges are replacements within the meaning of Regulation 60.