Penn Mutual’s Amazing Overreach

Posted at Advisors4Advisors.com on July 22, 2009

Penn Mutual is a Pennsylvania-domiciled mutual life insurance company, licensed to sell policies in all 50 states. One of its products is Guaranteed Protection UL, a universal life policy with a no-lapse guarantee. Here is one provision in the contract:

“The Company reserves the right to determine that the No-Lapse Guarantee Requirement has not been satisfied if at any time after a change in Owner or Beneficiary, the Company concludes that the new Owner or new Beneficiary would not have had an insurable interest in the Insured at the time the policy was issued. In addition, the Company reserves the right to determine that the No-Lapse Guarantee Requirement has not been satisfied if at any time, a new Owner or new Beneficiary has obtained the policy ownership and/or policy beneficiary designation with the intent to transfer ownership or any other benefits under the policy to a third party that does not possess an insurable interest in the Insured.”

In recent years, life insurance companies have taken steps to curb the purchase of life insurance policies for the benefit of speculators. These arrangements are called stranger-owned life insurance, stranger-initiated life insurance, speculator-initiated life insurance and other variations.

Penn Mutual’s contractual provision makes no distinction between these schemes and traditional life settlements, which are generally accepted as a legitimate option for policyowners to possess.

A few questions:

How will life settlement buyers react to Penn Mutual’s right to nullify the no-lapse guarantee? Will it make Guaranteed Protection UL policies unsaleable in the secondary market, or at least reduce their value?

Which Penn Mutual department came up with this idea? Legal? Actuarial? Marketing (hopefully not)?

Have state insurance departments reviewed and approved this provision?

It will be interesting to see if Penn Mutual retains this provision as more financial advisors and agents become aware of it and explain it to their clients.