Fraternal Benefit Societies V/s Insurance Companies

Jul 23, 2009

  1. Mark
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    I'm going to talk about the difference between insurance polices and insurance “Certificates” in this post.

    A lot of agents are writing for these type of companies and don't know the difference in a “Certificates” on a policy.

    I will follow up some a bunch of things, but I wanted to share with you just one letter that one of the insurance dept wrote to every agent. in their state on the matter.


    http://www.maine.gov/pfr/insurance/prod ... letter.htm

    January 14, 2008

    To: Maine Resident Producers with Fraternal Appointments
    Re: Fraternal Benefit Societies



    The Bureau of Insurance has developed some concerns about marketing efforts on behalf of some fraternal benefit societies. These concerns have developed especially from a number of recent inquiries from consumers and discussions with producers. We are therefore writing to every resident producer who is appointed with any fraternal benefit society, in order to help inform the producer community of these issues.

    There have been very significant increases in the recruitment of members and the corresponding purchase of some fraternal benefits. Some of these increases have pertained to Medicare Supplement coverage, and some have concerned life insurance. It is apparent that many consumers who have joined fraternal benefit societies and enrolled in the societies’ insurance programs are not aware of the fundamental differences between fraternal benefit societies and traditional insurers.

    It is equally apparent that many licensed producers who are soliciting and enrolling such consumers are also unaware of these differences. It appears that some solicitations have been based primarily upon premium/price differences almost exclusively, without regard to these legal and practical distinctions between insurance companies and fraternal benefit societies. As licensees, of course, all producers are required to understand the products and services they are selling. We are therefore reminding you of this obligation.

    Some of the important points to keep in mind concerning fraternal benefit societies relate in particular to what would happen in the event that there are any issues in the future regarding claims paying ability, and are as follows:

    Fraternal benefit societies are not covered by the provisions of the Insurance Code except when specified. Therefore, a number of consumer protections that are frequently presumed to exist are inapplicable, and it is important for producers and purchasers to know the difference. For example, the specific Insurance Code chapter governing the terms of Medicare Supplement coverage does expressly apply to those sold by fraternal benefit societies, but the coverage is not covered by guaranty funds when sold by fraternals.
    Fraternal benefit society insurance benefits are legally required to be assessable. In the event that a society’s claims paying ability becomes impaired, the members may be required to pay their proportional share of the deficiency. This is in keeping with the longstanding traditional status of fraternal benefit societies as charitable and benevolent organizations, as to which the members are both recipients of and providers of mutual benefits among the membership as a whole.
    Fraternal benefit societies are subject to significantly reduced capital and surplus requirements, and are not rated by A.M. Best or an equivalent.
    Every specific fact situation is different of course, but please be aware that the Bureau of Insurance considers it essential for licensed producers to provide at least the basic level of information that allows consumers to make informed choices. While it is not possible for this letter to itemize every aspect in which fraternal benefit societies differ from commercial insurers, the list above should serve to provide you with some important information that you can use to inform your clients and, frankly, help avoid claims that consumers received misleading information.

    At a minimum, consumers should be aware of all of the above points when considering enrolling in a fraternal benefit society, especially the facts that they are assessable and not covered by guaranty funds.

    In addition, these points need to be made in realistic fashion, rather than treated as mere technicalities. We have, for example, become aware of statements on the part of some producers suggesting that the presence of reinsurance somehow makes up for the fact that fraternal benefits are assessable and not covered by guaranty funds nor subject to otherwise applicable capital and surplus requirements. For a number of reasons this would be an inaccurate impression to leave with a consumer.

    In sum, it is important for producers and their consumers to understand the products being offered. While true in its own right for any purchase or enrollment, it is also specifically required when making comparisons between any existing coverage a consumer might already have and a different product for which they would terminate their previous coverage.

    The standards under the Insurance Code applicable to producer conduct and competence remain the same, whether the producers are soliciting on behalf of insurers or fraternal benefit societies. As noted above, a thorough product understanding is of particular importance when comparing the insurance benefits provided among the members of a fraternal benefit society and the terms of coverage provided by insurance companies.

    Thank you for your review of the points in this letter. We hope that it will help you to remain in compliance with your obligation to provide your clients with accurate information to enable them to make informed decisions.

    Very truly yours,



    Eric A. Cioppa
    Acting Superintendent of Insurance
    - - - - - - - - - - - - - - - - - -
    My brother Matt Rosenthal wrote the following on the subject and I wanted to share it with you all.

    With all that is being said in regards to companies issuing Life Insurance “Certificates” as opposed to Life Insurance “Policies”, I thought everyone would like to know the real main differences.

    To begin with, a Life Insurance “Policy” is governed by the D.O.I. (Department of Insurance) as well a Guaranty Association. The Life & Health Guaranty Fund protects life insurance contracts against failure in the performance of the contract due to the impairment or insolvency of the insurance company. All life policies issued by member companies of the Association which includes all companies licensed to transact life insurance in this state are protected by the Association.

    The amount that is guaranteed by a Guaranty Association varies from state to state. For example; The state of Virginia’s Guaranty Fund will go up to $350,000.00. I use this example because as we all know Shenandoah went into receivership. Their home state was Virginia, and therefore the Virginia Guaranty Fund will guarantee Shenandoah’s policy owners’ to have a guaranteed death benefit of up to $350,000.00, so long as premiums are paid, and the policy is in force. The state of Georgia’s Guaranty Fund reads like this; “The liability of the Association on any one life shall not exceed $100,000.00 regarding payment of cash values or $300,000.00 for all benefits including cash value.” Therefore, if you have a term policy with a Georgia based company, and they go insolvent, your policy’s death benefit is only guaranteed to $100,000.00 per claimant.

    A Life Insurance “Certificate” is also governed by the D.O.I. (Department of Insurance), but is NOT under a Guaranty Association. A Guaranty Fund excludes coverage for “Policies” (Certificates) issued by a charitable organization, a fraternal benefit society, a mandatory state pooling plan, a mutual assessment company, or by an insurance exchange, or a grants and annuities society holding a certificate of authority under Section 11520.

    You can usually find in the “Fine Print” of a Certificate that the company holds the right to raise rates of their members to cover claims should they not have the funds to cover said such claims, and in the event the funds can not be raised, said claims will NOT be paid.

    Basically, if a person has a “Policy” (issued by Insurance Companies), their policies are guaranteed up to certain amount by their state’s Guaranty Fund. However, if you have a “Certificate” (issued by a charitable organization, a fraternal benefit society, etc.) there is NO guarantee that your policies claim will be paid. Of course, a company selling “Certificates” usually have extra benefits such as scholarship funds, community service projects, and are usually cheap because of the way the keep reserves in Guaranty.

    In summary, I personally do NOT feel secure with selling for any company that issues “Certificates” for this simple reason… I know a lot of agents that sold for Shenandoah, and they like me never thought they would go into receivership, but they did. Fortunately, if someone makes a claim with them the Guaranty Fund will protect them. If it were a charitable organization, a fraternal benefit society, etc. that had issued “Certificates” that had went into receivership; those clients would have been unprotected. Now with a company basically broke and out of business, I believe that the client would go after the agent (and rightfully so). I personally do NOT want to be liable for death claims, and any time I have thoroughly explained to prospect that their “Certificate” is NOT guaranteed by a Guaranty, they have ALWAYS went with a regular insurance company.

    So how do you know if you are selling for an Insurance Company that issues “Policies” or a charitable organization, a fraternal benefit society, etc. that issues “Certificates”? That’s easy… They will usually tell you! Some of the most well-known fraternal benefits societies are Forestors, Royal Neighbors, Woodmen of America, and Knights of Columbus.

    Here are some links to D.O.I.’s stories regarding Fratenal Benefit Societies that I found useful:

    http://www.maine.gov/pfr/insurance/producer/fraternal_letter.htm

    http://www.forc.org/pdfs/vol15-ed4-art5.pdf

    http://www.njlifega.org/faqprint.cfm

    http://www.nelifega.org/faq.htm#_Toc27196249
     
    Last edited: Jul 23, 2009
    Mark, Jul 23, 2009
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  2. tcarlj
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    tcarlj Expert

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    I spoke to someone from a FBS today about this very subject, ironically enough. She acknowledged the difference, but pointed out because they are non-profits, the reserve requirements are far more stringent. The products are generally very limited, and because of these limitations, they are as safe as any other organization with a similar Best rating.

    I cant personally vouch for this info, as I havent researched it as of yet, but it is what was told to me a few hours ago.
     
    tcarlj, Jul 23, 2009
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  3. Mark
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    I just think the agent needs to explain to the client what they are really buying and make sure they know the difference. That is why the ins dept is warning agents. No agent wants to get sued or in trouble when the clients finds out they were not sold what they thought they were buying or didnt read the small print.
     
    Mark, Jul 23, 2009
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  4. Winter_123
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    Winter_123 Guru

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    You have to understand your state and what they allow you to say and dont. Believe me you could not make those statements about a fraternal organization in Maine. That may be because of variations in DOI interpretations or it may be because not all states do in fact require additional reserve requirements. Agents in Maine have tried to represent that fraternal organizations were as safe as regular carriers because, even though they were not covered by the state guaranty fund, they nevertheless had secondary insurance to back up their certificates. Makes sense. Only problem is, the state put the kaisbosh bigtime on fraternal organization and agents that tried to go down that road with clients.

    In addition, I dont think the pivotal issue is completely around certificates versus policies. I think it has more to do with whether the actual issuing entity is fraternal or not. Example: AARP issues a certificate rather than a policy and the State of Maine has not had the same heartburn or required the same warnings as for fraternal organizations. Most likely this is because AARP policies are actually issued by a true for-profit carrier. It is actually UHC that has direct line responsibility and UHC is actually covered by the state guaranty fund, unlike a fraternal org.

    My comments may not be completely right here but I think they are least part-way right on this. If Mark Griffins brother is expert in this area perhaps he would know more.
     
    Last edited: Jul 23, 2009
  5. Mark
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    Just read what you give to your client. Read the proposal also. Just go by what the company puts on their own paper. You don't have to go by what the ins dept says, or any agent. Go by what you print out from the company that is selling them.

    I've already seen one of the companies delete 2 riders for every app. 1 rider was to send your kid to college if the parent dies. They reserved the right to delete the riders at any time and they did. Guess the client should have just paid more attention to the small print.

    I called one of the companies on the phones and was told that they could make changes at any time on all the policies, but they have never done this before and didnt plan on doing it in the future.
     
    Mark, Jul 23, 2009
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  6. jdeasy
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    An agent cannot use the guaranty funds as a selling point. In fact, an agent is not to mention the existance of the guaranty funds.
     
    jdeasy, Jul 24, 2009
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  7. alexkane03
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    alexkane03 Super Genius

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    siad, this was inforced in the 90's Cant use the g fund as a selling point .the consept of both is Sound , no real risk is being taken in a cert, and to tell a 65 year old that a RNA is not as good as a regular insurance is misstating the truth. on personall leval I will buy a forester policy(cert) before buying a met life .
     
  8. Winter_123
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    Winter_123 Guru

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    If only it were that simple. In Maine for example. the DOI sent a letter around to agents saying that they must disclose to clients that med supp fraternal carriers are not covered by the guaranty fund. This is not something the companies put in its sales literature or as part of the disclosures with the app.

    In other words, my advice to agents would be the exact opposite of yours. I would not go just by what the carrier says. I would go by what the DOI says you must disclose.

    Just to name names here. Their concern was around United Commercial Travelers. UCT is no longer doing business in the state for, shall we say, "various reasons." If you were an agent who decided to follow what the carrier said rather than what the DOI said, you are probably no longer doing business in the state either.
     
    Last edited: Jul 24, 2009
  9. Norwayguy
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    Norwayguy I have spent way too much time here.

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    I know I am many months behind on posting on this issue but I ran into it again recently with a client that decided to go with a cheaper term policy with a faternal than the carrier I recommended....And I feel like this guidance from Maine is confusing. In essence if you sell a fraternals product you must disclose that it is not covered by State Guarantee Fund but in this instance I was recommending against the fraternal and we are not supposed to bring up State Guarantee Funds with out a direct client question about it....Little confusing :)
     
  10. Winter_123
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    To put a little finer point on it, it is actually a little worse than just not being covered by the guaranty fund, although that is true too. I dont know how often this has ever happened but a member can be assessed for a portion of the fraternal organizations liabilities should they go belly up or have a claim against them, or at least so the state advises.

    The way I deal with my questions like that is that I just call one of the attorneys at the DOI and ask them what can and cannot be said. They are decent enough folks. That is how I ended out cancelling my appointment with one of the fraternal organizations. I just spoke with the attorney to find out what is good and not good. I think you have to look at the intent of their prohibiting the mentioning of the guaranty fund. It is to avoid agents selling a shlocky product with a low financial rating but telling clients not to worry about it because the state will back it up, but if you are simply advising the client that the state guarantee fund does not cover fraternal organizations, the state most likely will thank you. But I would just call them. They are just watching out for agents who are working angles, not just advising the client of how it is. My compliance standards are higher than the state's so I dont hesitate to just talk with them.

    PM me offline if you want a contact name within the DOI.
     
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