SB 47-LIFE INSURANCE/ANNUITY EXEMPTIONS  5:34:42 PM CHAIR OLSON announced that the final order of business would be SENATE BILL NO. 47, "An Act relating to exemptions for cash surrender values, accrued dividends, and loan values of life insurance and annuity contracts." 5:36:32 PM GERMAN BAQUERO, Intern, Senator John Coghill, Alaska State Legislature, stated that Section 1 of SB 47 would repeal and reenact one AS 09.38.025 (a), which will essentially repeal the $500,000 cap on the exemption of un-matured life insurance policies, and reenacts it as a full exemption regardless of the value limit. Section 2 of the bill clarifies the applicability date. 5:37:27 PM MR. BAQUERO said this bill came about when some members of insurance industry and trust industry found more private employees are turning to life insurance and life insurance policies as new estate and retirement tools. He said that granting a full exemption was a means to treat all retirement funds as secured, just as public employee retirement accounts or union accounts, which are completely shielded by the federal government and not subject to garnishment. He stated that a zero fiscal note was attached to HB 47. He said that this bill does not shield life insurance policies from any type of criminal action, but refers to civil litigation. He directed attention to members' bill packets to [AS 09.38.065] claims enforceable against exempt property that provides the list of exceptions to the exemptions ranging from being able to levy against property to enforcing child support claims. 5:39:36 PM MR. BAQUERO He read a portion of paragraph (3), which read, "(3) a creditor may make a levy against exempt property of any kind to enforce the claim of a victim, including a judgment of restitution on behalf of a victim of a crime or a delinquent act, ...." He interpreted this to mean that this bill would not stop someone from trying to seek just restitution in a criminal situation. He said that the bill has opposition from the Alaska Bankers Association, who expressed concern that this could create a means to shield assets that could be garnished by a bank, but the sponsor found that interpretation a little wanting. For one thing, the exemptions under AS 09.38.030 [(c)], related earnings and liquid assets clearly states a creditor can levy upon the earning of an individual if the creditor's claim is enforceable under an order of a court of bankruptcy under the Bankruptcy Reform Act of 1978. Therefore the concerns of the banking industry are not quite accurate in terms of a debtor trying to hide or commit fraud. Finally, this bill does not interfere assigning a policy as collateral to a bank for a loan. He directed attention to AS 34.40.010, related to invalidity generally, basically says that anyone who assigns any of their property as collateral means that the person is assigning the property to them, subject to garnishment on any default. He said there really is not any fraudulent intent that could come along, but can help make life insurance policies more secure tools for estate planning while the policies remain un- matured. 5:42:57 PM REPRESENTATIVE LEDOUX related a scenario involving criminal action, but noted the standards of proof in a criminal action and a civil action are different. She asked for further clarification that regardless of the amount of damages, they can keep the insurance policy that may be valuable. MR. BAQUERO answered that the intent of the bill is not to harbor savings, earnings, or investment of an insurance policy; instead, the intent is to secure the investments a person makes in an insurance policy while the policy is un-matured. Once the policies have matured and the assets have transferred over to the beneficiary, the assets become the property of the beneficiary and are attachable. This bill was trying to put AS 09.38.025 in line with exemptions for retirement plans under AS 09.38.017. 5:45:53 PM REPRESENTATIVE LEDOUX asked whether retirement plans were exempt. MR. BAQUERO answered there was no numerical value limit since they are fully exempted. REPRESENTATIVE LEDOUX remarked she had some problems with that, too. 5:46:19 PM REPRESENTATIVE HUGHES suppose someone owes $500,000 to the creditor. She asked whether the creditor can come after the debtor. MR. BAQUERO stated that currently under AS 09.38.025, when the policy has matured the assets are attachable. This legislature pertains to un-matured life insurance and once the insurance was matured, the assets are accessible to garnishment. In further response to Representative Hughes, he said that once the value of the policy exceeds $500,000, it is subject to garnishment. 5:48:11 PM REPRESENTATIVE HUGHES related her understanding that was current law, but if this bill passes it could not be garnished. MR. BAQUERO answered that if the bill passed it would exempt all un-matured life insurance and annuity contracts regardless of the value limit. 5:48:37 PM REPRESENTATIVE KITO asked for the reason to make these changes. MR. BAQUERO answered that the trust and life insurance industry has found that once clients were buying policies up to $500,000, they found that clients wanted more protection similar to the protections that public employees have with respect to social security or the state's supplemental annuity plan. In fact the top ten highest gross retirement plans in the state's supplemental annuity were over $1 million and were shielded from garnishment. This bill was a means to level the playing field from private employees trying to find a new estate planning tool. 5:50:27 PM REPRESENTATIVE KITO asked for further clarification that in creating additional security with the policy does it decrease the cost to consumer for that policy. MR. BAQUERO deferred to the trust industry to respond. 5:50:55 PM RYNNIEVA MOSS, Staff, Senator John Coghill, Alaska State Legislature, echoed that the sponsor found that many people who wanted to invest money in a retirement system were limited to $500,000 to obtain the same benefits the union and public employees have. In addition, the sponsor was interested in building a trust industry in Alaska that helps to diversify the economy and potentially result in $58 million in taxes to the state in 2016. One disadvantage in getting people to invest more than $500,000 into a life insurance or annuity program is that money is not secure and is un-matured. Currently, the Alaska Trust Industry in Alaska has $50 million deposited in Northrim Bank since it is the limit for funds secured by FDIC [Federal Deposit Insurance Corporation]. The rest of their funds are invested in money markets and other investments. In conclusion, she recapped that the sponsor would like to create an industry and incentive people to invest in larger life insurance policies since the state assesses premium taxes on the life insurance policies. 5:52:44 PM REPRESENTATIVE KITO offered his belief that individuals investing more than $500,000 would be a small pool in Alaska. MS. MOSS answered that people from the Lower 48 invest in these life insurance policies. 5:53:12 PM REPRESENTATIVE LEDOUX offered her belief that the funds would be secure so long as people did not get into accidents and paid their bills. MS. MOSS suggested that people can go to other states to get the policies. She said that one objection the banks had was that they couldn't get to a life insurance policy prior to the insurance policy being issues. She said that banks are responsible for obtaining collateral at the time money is loaned. She suggested it was a little disingenuous to reach out after the fact and grab unto a life insurance policy that was purchased after loans were approved with other collateral. She suggested that if they issued a loan without an appropriate amount of collateral would be the bank's decision. She said a person shouldn't be punished for it. 5:54:36 PM REPRESENTATIVE LEDOUX asked whether John Q. Public who wants to collect his debts. MS. MOSS answered that state has exceptions to the exemptions, which was a fairly lengthy list, but it does not give carte blanche protection or immunity from paying debts. 5:55:05 PM REPRESENTATIVE JOSEPHSON stated that in his experience with debtors/creditors [in his law practice], that much of what we own is vulnerable. He suggested that most people are not worried about it and take one step at a time. MS. MOSS directed attention to the issue of equal treatment for retirement and the opportunity to build a nest egg for retirement. She stated that public employees and union employees are protected under federal law with a $500,000 limit for individuals. She acknowledged that this bill was a policy call. She said that her issue is that anyone who wants retirement system should be treated equally. 5:57:24 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community, & Economic Development (DCCED), said she testified on this bill in the Senate. She offered that the industry being discussed was new to Alaska. The life insurance industry in Alaska has come up with an idea that attempts to stimulate the insurance industry and provide something new to the state. She said people could question the other jurisdictions, such as Switzerland, have so much business in the financial industry. She answered that it was because they have created a favorable tax structure. 5:58:51 PM MS. WING-HEIER said that Vermont has been renowned for its captive insurance policies since Vermont built a good tax structure, as have other jurisdictions, such as the Bahamas, Bermuda, and the Virgin Islands. She offered her belief that Alaska's life insurance industry has expressed interest in several changes, including the $500,000 issue, which is not limited to Alaskans but some of the biggest polices in Alaska are sold to nonresidents. She characterized Alaska's tax structure as good, noting that after $100,000 the tax rate drops from .1 to .08 percent premium tax. If Alaska can become more competitive, the industry believes it can sell more and removing the $500,000 limit may help to do so. Secondly, life insurance is a very safe retirement vehicle for small employers, who may not feel comfortable with stocks and bonds. Once the insurance reaches $500,000, it becomes accessible to creditors. She acknowledged everyone should pay their debts; however, the issue of fair play should be considered, such that the public or unions paying into their retirement systems are protected, but the private sector employees are not. Thus creditors can access their $500,000 or un-matured cash value, but they cannot access the public employee's $500,000. 6:00:46 PM MS. WING-HEIER explained that this bill does not affect her division since the Division of Insurance's statutes fall under Title 21 [AS 21]; however, she has done some research. She said that [garnishments] can happen on life insurance and annuities with criminal actions, but not under civil actions. She recalled the Division of Insurance did receive a letter from the Department of Law to clarify that point. 6:01:38 PM REPRESENTATIVE LEDOUX expressed concern that the state might not want to allow bank accounts, like Switzerland does, in which people can avoid lawsuits and other things. MS. WING-HEIER answered she used Switzerland as an example, but noted that other jurisdictions that have taken actions on the insurance or financial industries have had good success. 6:02:45 PM REPRESENTATIVE JOSEPHSON surmised the administration supports this bill. MS. WING-HEIER answered that there has not been any opposition to the bill. In further response, she clarified that the division's statutes are under Title 21, not in Title 9 and the bill affects AS 09 and the administration has not given her any direction on this bill. 6:03:17 PM REPRESENTATIVE JOSEPHSON said he was in the process of vetting SB 47, but he has found that normally when the department is neutral on a bill, the administration doesn't necessarily support the bill. He assumed that was the case with SB 47. MS. WING-HEIER reiterated that this bill would affect AS 09 and not the insurance code that falls under AS 21. 6:04:25 PM REPRESENTATIVE KITO suggested that it might be necessary to protect consumers and residents of Alaska, for example, if the state was creating a new product, it will be important that the product not harm anyone in Alaska. He said he would like to learn more about potential impacts on Alaskans. 6:05:10 PM REPRESENTATIVE HUGHES said [the changes proposed in SB 47] sounds like a new economic opportunity. She asked whether this could bring in hundreds of millions to the state. MS. WING-HEIER answered the insurance industry is the second largest contributor to the general fund in premium taxes. If the insurance industry was right in its predictions, it could be significant to Alaska. Certainly, the state charges 2.7 percent as a rule on all premiums that come into the state. Life insurance taxes on premiums drop to 1 percent after $100,000 in premium. She estimated that the premium taxes would be approximately $55 or $56 million and if the market changed and the industry can entice people from the Lower 48 to invest in trusts, annuities, and life insurance, it could be significant to the state. 6:06:36 PM CHAIR OLSON asked for further clarification on the tax cap of .08 percent. MS. WING-HEIER answered that another bill [SB 15] would reduce the premium tax from 1 percent to .08. CHAIR OLSON asked for the projections on a bill that passed 3-4 years ago in which the state gave up premium taxes. MS. WING-HEIER offered to research and provide the information. 6:07:50 PM MATTHEW BLATTMACHR, Vice-President & Trust Officer, Alaska Trust Company, stated that Alaska Trust Company doesn't offer insurance services nor was one that the company was pushing forward, but the Alaska Trust Company supports it. He explained that a substantial portion of its business comes from estate planning with life insurance and annuity contracts. 6:08:44 PM MR. BLATTMACHR asked how much was lost in revenue for the previous premium taxes. He said the statute currently reads that the state charges 2.7 percent on any premium under 100,000 and it drops ten basis points after $100,000. At the time that bill passed, the Alaska Trust Company asked the Division of Insurance for largest policy premium, with no policy in excess of $50,000. This didn't give up any premium tax revenue, but gave an incentive to receive additional large policies. 6:09:50 PM CHAIR OLSON asked whether the prior bill affected any premium tax impact. MR. BLATTMACHR testified it was his understanding it did not. 6:10:06 PM CHAIR OLSON asked for further clarification on why the bill was passed. He recalled it was going to bring in large premium policies. MR. BLATTMACHR answered that did impact a number of policies that came to the state, but it did not cost to implement the changes. 6:10:47 PM MR. BLATTMACHR said that the life insurance industry is growing in Alaska and contributes to the state's economic industry. He said that the trust industry in Alaska deals with life insurance almost on a daily base so it is in support of the bill as a means of keeping Alaska as attractive environment. 6:11:25 PM REPRESENTATIVE HUGHES related her understanding that the last change to 1 percent in taxes didn't affect revenue. She asked what Alaska gained. MR. BLATTMACHR answered that the discussion today was regarding SB 47, but the tax change was contained in SB 15. However, he did state that Alaska has received additional policies it likely would not have received due to the favorable tax structure. He suggested that the exact number would be difficult to determine, but he offered that currently, the state has a substantial number of large policies. 6:12:36 PM LINDA HULBERT stated that she was involved in the insurance industry as an agent for 25 years and prior to that she spent 20 years in the educational community in Alaska. She said she does not represent any companies, but represents herself. She said that this protection was available in many states throughout the United States, including New York, Florida, Texas, and Arizona. She said that many states have the exemption for life insurance and annuities as part of their state policies. She said that if someone were to move from Alaska to New York and took their insurance policy with them and changed their residency, they would have this protection. She characterized this as a fairness issue and an opportunity to create revenue and an opportunity for savings. 6:14:37 PM CHAIR OLSON asked whether NAIC has any model legislation. MS. WING-HEIER answered no, not with respect to lifting the cap for creditors since it does not affect Title 21. 6:15:02 PM REPRESENTATIVE KITO asked whose responsibility Title 9 fell under. MS. WING-HEIER said she was unsure since statutes governing the Division of Insurance fall under Title 21, so she was unsure who administers the title. [SB 47 was held over.]