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
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?
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?
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).
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.
New York Insurance Law 1101(a) (McKinney 2000) defines doing an insurance business:
In this article: (1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
(2) "Fortuitous event" means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
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:
No person, firm, association, society, or corporation engaged in this state in the business of providing for the payment of funeral, burial or other expenses of deceased members, whether or not it be subject to the other provisions of this chapter, . . . shall (1) deliver or issue for delivery in this state any contract or policy whereby the benefit or any part thereof accruing under such contract or policy, upon the death of such member or of the person insured, shall be payable to a designated or restricted funeral director or funeral directing concern or other person engaged in such trade or business, or to any official or designated group of them; or . . . (3) in any way deprive the personal representative or family of the deceased of the advantages of competition in procuring and purchasing supplies and services in connection with the funeral and burial arrangements of such deceased.
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:
Any life insurance company authorized to do business in this state may deliver in this state policies of group life insurance only as follows: . . . (12) A policy issued to an association . . . to insure association members subject to the following: (A) Each association shall have (i) A minimum of two hundred insured members at the policy's date of issue; (ii) Been organized and maintained in good faith for purposes principally other than that of obtaining insurance; (iii) Been in active existence for at least two years; and (iv) A constitution and by-laws which provide that: (I) The association holds regular meetings not less than annually to further purposes of the association; (II) The association collects dues or solicits contributions from members; and (III) The members have voting privileges and representation on the governing board and committees.
(B) The premium for the policy shall be paid by the association or trustees either wholly from funds contributed by the association or by the insured individuals, or from funds contributed jointly by the association and insured individuals. . . .
(C) The amounts of insurance under the policy shall be based upon some plan precluding individual selection either by the insured persons or by an association. . . .
(D) Except as provided in paragraph five of subsection (a) of section three thousand two hundred twenty of this chapter [allowing facility of payments clause], such policy shall provide for the payment of benefits to the person insured or to some beneficiary or beneficiaries, other than the association or any officials, representatives, trustees or agents thereof and shall provide for the issuance of a certificate to the persons insured or such beneficiary, as evidence of such insurance. (emphasis added)
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:
In addition to any other basis under which either an employer. . . have an insurable interest in the lives of any of its employees or retirees or those of its subsidiaries or affiliated companies, an employer . . . shall have an insurable interest in the lives of any such employees or retirees who are participants or who are eligible to participate, upon the satisfaction of age, service or similar eligibility criteria, in an employee benefit plan, established or maintained by an employer as defined by the federal Employee Retirement Income Security Act of 1974 provided that: . . .
(2) At the time coverage is issued, the total amount of insurance coverage issued to date to the employer . . . under authority of this subsection shall not exceed the costs of employee and/or retiree benefits already incurred in connection with such employee benefit plan since the earliest date coverage on an employee or retiree was issued under this subsection, plus the projected future cost of such benefits as established by the employer. (3) The amount of coverage insuring the life of each such employee or retiree and the selection of the employees or retirees to be insured is based purely on nondiscriminatory factors . . . and not on conditions or terms of employment other than participation in an employee benefit plan described herein. . . .
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.