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.