03/16/2009 08:00 AM House JUDICIARY

HB 101 - EXEMPTIONS: LIFE INSURANCE; ANNUITIES                                                                                
                                                                                                                                
8:33:37 AM                                                                                                                    
                                                                                                                                
CHAIR RAMRAS announced that the  final order of business would be                                                               
HOUSE BILL  NO. 101,  "An Act  exempting the  full value  of life                                                               
insurance and  annuity contracts  from levy to  satisfy unsecured                                                               
debt,  and amending  the description  of earnings,  income, cash,                                                               
and  other  assets  relating to  garnishment  of  life  insurance                                                               
proceeds  payable upon  the death  of an  insured."   [Before the                                                               
committee  was  the proposed  committee  substitute  for HB  101,                                                               
Version 26-LS1076\E,  Bailey, 2/19/09,  which was adopted  as the                                                               
work draft on 3/2/09.]                                                                                                          
                                                                                                                                
8:34:17 AM                                                                                                                    
                                                                                                                                
AMANDA  MORTENSEN, Intern,  Representative  John Coghill,  Alaska                                                               
State Legislature,  explained that HB  101 would exempt  the full                                                               
value of  life insurance and annuity  [contracts] from attachment                                                               
by  creditors,  thereby  protecting Alaskan  families  and  their                                                               
ability  to  plan  for  their   future.    Retirement  plans  are                                                               
currently protected  under federal  law, and  HB 101  would offer                                                               
similar  protection  to someone  who,  as  an employee,  uses  an                                                               
annuity contract in lieu of a  retirement plan.  Section 1 of the                                                               
bill  would remove  the existing  $10,000 exemption  cap on  life                                                               
insurance and annuity  contracts, and Section 2  would remove the                                                               
words "or payable" [from AS  09.38.030(e)(4)] in order to clarify                                                               
a  potential ambiguity  regarding attempts  to garnish  the death                                                               
benefits of an individual who has not yet passed away.                                                                          
                                                                                                                                
[Chair Ramras turned the gavel over to Vice Chair Dahlstrom.]                                                                   
                                                                                                                                
MS.  MORTENSEN,  in  response   to  a  question,  explained  that                                                               
Version E no longer  contains the word "unsecured"  in the title;                                                               
this  will allow  the  bill to  apply to  debts  other than  just                                                               
unsecured debts.                                                                                                                
                                                                                                                                
[Vice Chair Dahlstrom returned the gavel to Chair Ramras.]                                                                      
                                                                                                                                
MS. MORTENSEN,  in response to  another question,  explained that                                                               
HB  101 will  not prevent  creditors from  garnishing a  person's                                                               
other assets  in order to  satisfy a  debt; again, the  bill will                                                               
only protect the person's life  insurance and annuity [contracts]                                                               
from  attachment  by  creditors,   thereby  also  protecting  the                                                               
beneficiaries  of  such contracts.    In  response to  a  further                                                               
question, she offered her understanding  that state law currently                                                               
protects other types of retirement plans.                                                                                       
                                                                                                                                
8:38:25 AM                                                                                                                    
                                                                                                                                
DENNIS BAILEY,  Attorney, Legislative Legal  Counsel, Legislative                                                               
Legal and  Research Services,  Legislative Affairs  Agency (LAA),                                                               
concurred.  In response to another  question, he said that HB 101                                                               
removes  the   existing  monetary   limitation  on   the  state's                                                               
protection  of  life  insurance  and  annuity  [contracts].    In                                                               
response  to  comments, he  concurred  that  state law  currently                                                               
prohibits the fraudulent use of  such contracts, such as entering                                                               
into such a contract in order to avoid having to pay a debt.                                                                    
                                                                                                                                
REPRESENTATIVE  HOLMES  indicated that  she  is  amenable to  the                                                               
bill's  proposal to  remove the  existing monetary  limitation on                                                               
the   state's   protection   of  life   insurance   and   annuity                                                               
[contracts].                                                                                                                    
                                                                                                                                
MR. BAILEY,  in response to  a question, explained  that removing                                                               
the  word   "unsecured"  from  the  title   clarifies  that  [the                                                               
provisions of  the bill] could  be applied regardless  of whether                                                               
the  debt is  unsecured.    In response  to  other questions,  he                                                               
assured the committee  that banks are aware of  state and federal                                                               
exemptions  to  what  they  may  levy  to  satisfy  a  debt,  and                                                               
acknowledged that  the bill might affect  a lending institution's                                                               
willingness to grant a particular loan.                                                                                         
                                                                                                                                
REPRESENTATIVE  GRUENBERG  expressed   concern  that  passage  of                                                               
HB 101 could have  a detrimental effect on  a lending institution                                                               
that  had based  its decision  to  grant a  loan in  part on  the                                                               
current exemptions.                                                                                                             
                                                                                                                                
MR.  BAILEY suggested  that an  applicability provision  could be                                                               
added  to  the  bill  to address  situations  involving  existing                                                               
[loans/contracts].                                                                                                              
                                                                                                                                
REPRESENTATIVE GRUENBERG questioned whether  applying the bill to                                                               
[existing contracts] might raise a constitutional problem.                                                                      
                                                                                                                                
MR. BAILEY  said he  doesn't believe that  the bill  as currently                                                               
written would  apply retroactively  to an existing  contract; his                                                               
interpretation is  that the  bill would  only apply  to contracts                                                               
entered into after its effective date.                                                                                          
                                                                                                                                
REPRESENTATIVE GRUENBERG said:                                                                                                  
                                                                                                                                
     As  I  understand  this  bill, it  will  apply  to  all                                                                    
     attempts  at execution  after the  effective date,  and                                                                    
     what I'm  concerned about is  if there is  an attempted                                                                    
     execution after the effective date  for a contract that                                                                    
     was entered  into ... prior  to the effective date.   I                                                                    
     think it  would apply, because the  execution was after                                                                    
     the effective date, but it  would impair the contract -                                                                    
     [the]  loan   -  that  was  entered   into  before  the                                                                    
     effective date. ... I think  to be sure that there's no                                                                    
     unconstitutional impairment of  that contract, we would                                                                    
     need  - to  be absolutely  certain  - an  applicability                                                                    
     section  that would  apply  to  contracts entered  into                                                                    
     after the effective date.                                                                                                  
                                                                                                                                
MR. BAILEY indicated  that [including such a  provision] would be                                                               
advisable;  it  would  clarify  that  the  bill  applies  to  the                                                               
contract rather  than to the  execution.  He also  indicated that                                                               
he could  draft such a provision.   In response to  questions, he                                                               
said  that  the  concept  of  HB  101  applies  broadly  to  life                                                               
insurance  policies and  annuity  contracts that  are subject  to                                                               
collection; that who  pays for an insurance policy  won't have an                                                               
effect  on  the  bill's  applicability; and  that  the  exemption                                                               
offered in the bill only  applies to unmatured life insurance and                                                               
annuity contracts.                                                                                                              
                                                                                                                                
REPRESENTATIVE  GRUENBERG  noted  that  the bill  uses  the  term                                                               
"individual"  rather  than  the  term  "person",  which  includes                                                               
organizations.   He  asked  whether the  bill,  then, would  only                                                               
apply to individuals, not organizations.                                                                                        
                                                                                                                                
MR. BAILEY said that would be the case.                                                                                         
                                                                                                                                
8:58:14 AM                                                                                                                    
                                                                                                                                
LINDA  HULBERT,  Agent,  New  York  Life  Insurance  Company,  in                                                               
response to a question, offered her  belief that HB 101 will help                                                               
Alaskans  better plan  for their  future,  particularly now  that                                                               
many  employers  no  longer  offer  or  contribute  to  qualified                                                               
retirement plans  as part of  their benefit package.   For people                                                               
who legitimately want to use  life insurance or annuity contracts                                                               
as a "planning vehicle," either  to protect their families or for                                                               
their retirement, HB  101 would provide them  with an opportunity                                                               
to  do so  in good  faith.   Currently,  10 other  states have  a                                                               
similar provision  in law, she relayed,  and so she felt  that it                                                               
would be a  valuable planning tool for Alaskans to  have as well.                                                               
She  offered her  belief  that if  someone were  to  use [a  life                                                               
insurance or  annuity contract] in  a fraudulent manner  in order                                                               
to avoid  creditors, the  courts would invade  it anyway,  and so                                                               
the provisions of the bill couldn't be abused by such a person.                                                                 
                                                                                                                                
MS. HULBERT,  on the issue  of "collaterally  assigning annuities                                                               
and life  insurance", pointed out  that lending  institutions are                                                               
very  careful   and  thus  will  often   require  the  collateral                                                               
assignment  of a  customer's  life insurance  or  annuity.   This                                                               
means that  the lending institution  "stands first" on  the death                                                               
benefit,  and so  if someone  who's  collaterally assigned  their                                                               
life insurance  or annuity dies, no  payout will be made  [to the                                                               
beneficiaries] until  the lending institution  properly documents                                                               
how much  is owed  to it.   Once  that is  done to  the insurance                                                               
company's  satisfaction, it  pays the  lending institution,  with                                                               
the balance  going to the  beneficiaries.  Furthermore,  once any                                                               
debt is  paid on  a loan  involving a  collaterally-assigned life                                                               
insurance or  annuity contract, paperwork  can be  completed that                                                               
will remove the collateral assignment.   She surmised, therefore,                                                               
that  passage of  HB 101  wouldn't have  a detrimental  effect on                                                               
lending institutions.                                                                                                           
                                                                                                                                
MS. HULBERT,  in conclusion, relayed  that it was she  along with                                                               
several other people  who brought forth the concept of  HB 101 to                                                               
the sponsor.  In response  to questions, she, too, explained that                                                               
qualified  retirement plans  are  protected by  federal law  from                                                               
creditor claims,  and explained that  a person cannot  waive such                                                               
protection or  pledge pension money  to a lending  institution in                                                               
order to procure a loan.                                                                                                        
                                                                                                                                
9:07:00 AM                                                                                                                    
                                                                                                                                
MR.  BAILEY, in  response to  comments and  questions, reiterated                                                               
that  the  bill only  applies  to  unmatured life  insurance  and                                                               
annuity contracts, not to the proceeds of any such contract.                                                                    
                                                                                                                                
[Chair Ramras turned the gavel over to Vice Chair Dahlstrom.]                                                                   
                                                                                                                                
MR.  BAILEY,  in response  to  a  question, reiterated  that  the                                                               
legislature could and  probably ought to clarify, via  the use of                                                               
an applicability  provision, that the  bill only applies  to life                                                               
insurance and  annuity contracts  created after the  bill becomes                                                               
law.                                                                                                                            
                                                                                                                                
[Vice Chair Dahlstrom returned the gavel to Chair Ramras.]                                                                      
                                                                                                                                
MR. BAILEY,  in response to  a further question,  reiterated that                                                               
he  could draft  an applicability  provision to  ensure that  the                                                               
bill  will only  apply to  life insurance  and annuity  contracts                                                               
entered into  after the bill  is enacted.   In response  to other                                                               
questions,  he again  reiterated that  the exemption  provided by                                                               
the bill  only applies  to unmatured  life insurance  and annuity                                                               
contracts.                                                                                                                      
                                                                                                                                
MS. HULBERT  added that the  cash value  and death benefits  of a                                                               
life insurance policy could be  levied by creditors if the policy                                                               
holder  collaterally  assigns  that   cash  value  to  a  lending                                                               
institution.                                                                                                                    
                                                                                                                                
CHAIR  RAMRAS surmised  that there  is nothing  in the  bill that                                                               
would disturb  the relationship between  a borrower and  a lender                                                               
to  consummate a  commercial transaction,  and characterized  the                                                               
change  proposed  by  the  bill   as  being  very  beneficial  to                                                               
consumers and their families.                                                                                                   
                                                                                                                                
MS. HULBERT, in  response to a question,  reiterated that federal                                                               
law protects qualified  retirement plans, and said  that the bill                                                               
won't affect  a person's  ability to  collaterally assign  a life                                                               
insurance policy or an annuity to a lending institution.                                                                        
                                                                                                                                
REPRESENTATIVE  GRUENBERG  questioned   whether  a  reference  to                                                               
proposed AS  09.38.025(a) ought to  be added  to page 2,  line 5,                                                               
after the language "AS 09.38.015 or 09.38.017".                                                                                 
                                                                                                                                
MR. BAILEY indicated that he would research that issue further.                                                                 
                                                                                                                                
CHAIR  RAMRAS, after  ascertaining  that no  one  else wished  to                                                               
testify, closed public testimony on HB 101.                                                                                     
                                                                                                                                
9:23:21 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG [made  a  motion  to adopt]  Conceptual                                                               
Amendment 1 as stated by Mr. Bailey.                                                                                            
                                                                                                                                
MR.  BAILEY  stated that  the  language  would conceptually  read                                                               
something  along   the  lines   of:     "The  amendments   to  AS                                                               
09.38.025(a),  as enacted  in Section  1 of  this bill,  apply to                                                               
life  insurance  and annuity  contracts  entered  into after  the                                                               
effective date of this Act."                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG indicated  that  his  intention is  for                                                               
Conceptual Amendment 1 to apply to the entire bill.                                                                             
                                                                                                                                
REPRESENTATIVE HOLMES  questioned whether Conceptual  Amendment 1                                                               
would really  accomplish what's intended or  address the concerns                                                               
of the committee.                                                                                                               
                                                                                                                                
REPRESENTATIVE GRUENBERG acknowledged that it might not, and                                                                    
suggested that the bill be held over to allow the drafter time                                                                  
to formulate the appropriate language.                                                                                          
                                                                                                                                
REPRESENTATIVE  GRUENBERG then  withdrew Conceptual  Amendment 1,                                                               
and again asked  the drafter to consider whether  the language on                                                               
page 2,  line 5, ought  to also  include a reference  to proposed                                                               
AS 09.38.025(a).                                                                                                                
                                                                                                                                
CHAIR RAMRAS relayed that HB 101 [Version E] would be held over.