Life Insurance Compliance Rules

Many CPAs believe they know enough about insurance to advise their clients. This knowledge—and the overconfidence it can sometimes bring—puts CPAs and their firms on the wrong side of some compliance rules. To avoid this problem, firms must master four main areas of insurance compliance: services provided, licenses required, disclosure and recordkeeping.

SERVICES PROVIDED

In the normal course of business, CPA firms provide clients with strategic, tax and accounting advice related to general insurance matters. The supplementary marketing materials describing the firm’s insurance services must be both appropriate and accurate. For example, in Florida, agents of a major insurance company sold “retirement plan investments” to a group of nurses. Because the company failed to describe these financial instruments as insurance, the nurses successfully sued.

Although most CPAs are savvy financial forecasters and spreadsheet creators, compliance guidelines require an insurance agent to use the actual illustration provided by an insurance company when selling a policy. When working with variable life policies, agents are expressly prohibited from using any sales documentation not provided by the carrier and approved in advance by the National Association of Securities Dealers (NASD).

CPA firms may include their own abstractions and spreadsheets for insurance products other than variable life policies. But the client must also receive the carrier’s illustration—regardless of how the CPA feels about its content and presentation. CPA firms should be cautious when creating and using spreadsheets in their insurance practice to make sure they don’t use projections that are not backed up by the actual policy.

LICENSING REQUIREMENTS

The licensing issues CPAs face in the insurance field are not overly complicated. While specific licensing requirements vary by state, here are some basic rules:

Whoever presents the insurance product to the client needs an insurance license.

Whoever receives a commission paid by an insurance company for the sale of an insurance policy needs an insurance license.

Whoever offers advice for a fee on an insurance policy that is unconnected with the purchase of a policy needs to have a life policy analyst license. Read these regulations carefully. While there are three exemptions to this rule, none of them apply to CPAs.

The CPA firm itself needs a license if it receives insurance sales commissions. Further, the rules require a firm employee to also have an insurance license. A good way to meet these requirements is to license an LLC owned by the partners of the CPA firm to sell insurance. The licensed individual would work for this entity.

Anyone who sells variable life insurance policies or variable annuities is required to have an NASD license, along with an insurance license. NASD licenses are the series 6 (investment company and variable contracts representative license) or the series 7 (general securities representative license) and the series 63 (multistate license). In addition, the firm needs to affiliate with an NASD licensed broker–dealer.

There is also a beginning and continuing professional education requirement for insurance licenses. For example, California requires 52 hours of prelicense education before qualifying to take the life insurance exam. During the first four years, licensees must take at least 25 CPE hours per year. Thereafter, the CPE requirement is 15 hours annually in a course approved in advance by the California insurance department.

DISCLOSURE

Client-related compliance requirements focus primarily on information disclosure. (Liability issues usually stem from a client’s misunderstanding of life insurance policies and their changeable nature.) The major written disclosures compliant firms are required to provide explain:

That the CPA firm has a financial interest in the transaction and will earn a commission.

The creditworthiness of the insurance carrier as shown by Standard & Poor’s, Moody’s and A.M. Best.

The legal and tax issues associated with the proposal, including current and projected interest rates and mortality tables and the columns showing guarantees by the insurance company.

The changeability of life insurance policies and that all numbers are based on the insurance company’s current assumptions and will change.

Insurance company guarantees including minimum interest credited to the insured’s account and mortality charges on the policy (typically based on the 1980 Commissioner’s Ordinary Mortality Table).

RECORDKEEPING

Firms should keep meticulous records to document that all of the work on a particular transaction was conducted within compliance guidelines. It’s best to make all insurance records either part of the client’s permanent file or easily accessible in a separate file. The file should contain records of all discussions for each client meeting concerning insurance; include who was there, topics discussed, conclusions reached and recommended actions.

When closing a transaction, CPA firms should create a comprehensive closing document. It should include details of the transaction, its intended purpose, compliance documents and important filing dates. A tickler file that runs the entire term of the policy can be a reminder of, for example, things such as discounts if the person suddenly stops smoking or cancer remission time limits.

The last part of the closing document should be an appendix containing signed copies of all related legal agreements: the policy itself, illustrations, trusts, collateral assignments, loan and financing documents, payment schedules, tax due dates and tax opinions.

When tax laws change, a policy may no longer serve its intended purpose. A good recordkeeping system will enable CPAs to search databases quickly to find those clients to whom the new change applies, notify them immediately and arrange a meeting to consider if any coverage modifications are needed.

WHAT’S NEXT?

As CPA firms become more active in offering clients a comprehensive array of financial services including insurance, the compliance requirements will increase—particularly in the area of recordkeeping. This is the nature of public accounting as a self-regulating industry. CPAs will become the best-positioned professionals to monitor legal and tax changes in the insurance industry. The forward-thinking CPA will monitor industry changes, apply them to individual client situations and recommend adjustments to client insurance strategies.

Neil Alexander, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is nalex@alexcap.com .