SB 47-LIFE INSURANCE/ANNUITY EXEMPTIONS  2:23:17 PM CHAIR MCGUIRE announced the consideration of SB 47. "An Act relating to exemptions for cash surrender values, accrued dividends, and loan values of life insurance and annuity contracts." She noted that this was the first hearing. SENATOR COGHILL, sponsor of HB 47, explained that the bill amends Title 9 relating to exemptions on life insurance annuities and accrued dividends. He deferred further introduction to his intern. 2:24:32 PM GERMAN BAQUERO, Intern, Senator John Coghill, introduced SB 47 speaking to the following sponsor statement: [Original punctuation provided.] Under the Alaska Exemptions Act under Chapter 38 of Title 9 in the Code of Civil Protections there are currently six exemptions that exist from attachment, garnishment, or execution by a creditor in civil actions. One of these exemptions under AS 09.38.025(a) is an exemption of up to $500,000 on un-matured life insurance. SB 47 goes in and repeals the $500,000 limit in AS 09.38.025(a). In effect SB 47 brings AS 09.38.025(a) in line with other exemptions found in the Alaska Exemption Act, such as: burial plots, longevity bonuses, tuition credits, the permanent fund dividend, medical benefits, liquor licenses, payments found under the Senior Benefits Payment Program, compensation of benefits exempt under federal law, and retirement plan interests and payments. While the law currently provides protection of non- estate assets up to $500,000, having a limit in the first place clearly does not assist in the protection of assets or pre-bankruptcy planning. While states like South Carolina, Wisconsin, and New York expressly define cash surrender values from life insurance as exempt, still many states ultimately rely on judicial interpretation of a debtor's intent. This bill will provide people with a better security and planning for their families after they have passed on. This bill encourages personal responsibility and protects the future of Alaskan families. MR. BAQUERO highlighted the zero fiscal note and then addressed the concern about the potential to use these policies to defraud a creditor. He advised that these policies can be attached if they're assigned as collateral, and Alaska's estate planning laws do not protect individuals who engage in estate and financial planning to willfully defraud a creditor. Also, the four-year state look-back and the ten-year federal look-back to review bankruptcy proceedings are ample to discourage fraudulent activity. He suggested that Matt Blattmacher with the Alaska Trust Company could expand on the explanation. Finally, AS 09.38.065 lists the gamut of opportunities for a creditor to receive just restitution against exempt property. He reiterated that this bill only says that unmatured life insurance policies are secure and remain a safe financial tool for families or an individual to provide for their beneficiaries in the future. 2:31:37 PM SENATOR WIELECHOWSKI asked how accessible an unmatured life insurance policy is in an annuity contract. He explained he doesn't want to establish a process for people to avoid their personal debts or to shield their money from a lawsuit. MR. BAQUERO deferred to Mr. Blattmachr. MATTHEW BLATTMACHR, Alaska Trust Company, Anchorage, Alaska, explained that the only value to an unmatured policy is the cash value and only permanent types of insurance contracts have a cash value, not term insurance. Also, Alaska law has a four-year statute of limitations for bankruptcy look back. If someone were to contribute a large amount of money to a life insurance policy and then claim bankruptcy or have a creditor proceeding, the state would have four years to look back at any transfer or conveyance that individual made and determine whether or not it intentionally had the malicious nature of being fraudulent. In addition, the federal bankruptcy statutes provide a 10-year window to look back. 2:35:55 PM SENATOR WIELECHOWSKI asked if an unmatured multimillion dollar life insurance policy would be protected if the insured was found responsible for a car accident that resulted in the death of another person. MR. BLATTMACHR answered he didn't know if a court has the ability to enforce it, but he sees no reason that the policy couldn't be assigned to pay off a judgement once the insured passes. He suggested that Linda Holbert might be able to describe other options. SENATOR MICCICHE asked what proportion of unmatured life insurance policies and annuity contracts are worth over $0.5 million. MR. BLATTMACHR surmised it's a fairly high percentage. Life insurance is a growing form of estate and retirement planning and $0.5 million would be quickly reached if someone were to calculate the cost a premature death would have on their family, even if they didn't have a high annual income. SENATOR WIELECHOWSKI asked if a lot of people with large unmatured life insurance policies and annuity contracts are declaring bankruptcy and if it makes sense to raise the cap to $2 million. MR. BLATTMACHR reiterated that more of these policies are being purchased and they're for larger face values. A lot of times it's done for business planning purposes, because it could make the difference between success and failure for a company if a key person were to suffer an untimely death. He noted that some local banks voiced concern that this legislation would prohibit using the policies as collateral, but that's not accurate. The bill just provides some protection in the event the policy is not assigned. 2:41:52 PM LINDA HULBERT, Agent, New York Life Insurance, Fairbanks, Alaska, stated that she has worked with families in the insurance industry for the last 25 years helping them pass along their assets to their children and family. She offered to answer questions. SENATOR WIELECHOWSKI asked what problem this legislation seeks to fix. MS. HULBERT explained that this change will help Alaska stay on par with the other states that offer this type of protection. The financial world is changing and a pension through an employer or Social Security isn't necessarily secure today. This is one way to help individuals and small businesses plan for the future for their families and retirement. Addressing the question about increasing the cap, she pointed out that 10 or 15 years ago $0.5 million sounded like a lot, but in an annuity at five percent that might only yield $50,000 per year. She described the legislation as a good tool of public policy that does not change Alaska's strong fraudulent transfer rules. The assets of anyone who has committed a crime would be reachable, just as they are today. This is a planning tool for individuals to plan for a secure future for their family and a secure future for themselves in retirement. 2:45:53 PM SENATOR COGHILL asked if there are limitations on state or federal annuities or pensions. MS. HULBERT explained that each state governs insurance and annuities so the federal government doesn't enter in. About 10 states offer this type of planning tool that allows people to place their money in these instruments so it will be available for their family in the event of their death or they'll have the cash value of the policy to help for retirement. SENATOR COGHILL asked if state SBS annuities are affected by this legislation. MS. HULBERT said she didn't know for certain, but the Division of Insurance supports the bill as good public policy. She added that she believes this will raise revenue for the state because 2.7 percent of every life insurance policy or annuity contract goes into the state coffer. SENATOR WIELECHOWSKI asked if there's is a provision that allows someone to pierce the exemption when there has been illegal activity such as driving drunk and killing someone or rape or murder. MS. HULBERT offered her understanding that a person's assets would be reachable if they committed a crime. SENATOR WIELECHOWSKI asked what sort of claims are involved to get the assets. MS. HULBERT said she didn't know, but many other states and the Division of Insurance feel this is a legitimate planning tool. She wasn't aware of any way that people could be wronged by it. SENATOR COGHILL suggested he and Senator Wielechowski could look into the fraud protections and bring the information to the committee. He asked if insurance contracts are written to include fraud protections or if it's in state law. MS. HULBERT advised that fraudulent transfer provisions and insurance are governed by state law. 2:53:08 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community and Economic Development (DCCED), clarified that the bill is written for Title 9, not Title 21. She explained that life insurance is a simple tool for retirement planning that some people find easier to understand than working with a financial planner on annuities and a mixed plan. Often the life insurance product is their sole retirement plan, which is probably why the sponsor is trying to remove the $0.5 million cap. Addressing Senator Wielechowski's question, she said her understanding is that this is for civil matters. SENATOR WIELECHOWSKI said it would ease his concerns if she would point to the specific provision in the law. MS. WING-HEIER agreed to follow up with the information. SENATOR COGHILL clarified that the intent is to give people a legitimate reason to invest in estate planning. SENATOR WIELECHOWSKI asked if an insurance contract would be shielded in a drunk driving incident when the family files a civil lawsuit. MS. WING-HEIER offered to seek clarification from the Department of Law (DOL) and follow up at the next hearing. SENATOR MICCICHE interpreted AS 09.38.030 to mean that payments on a criminal offense are not shielded. SENATOR WIELECHOWSKI said his reading is that restitution ordered by the court could possibly pierce this exemption, but he didn't know how that applies to civil lawsuits. CHAIR MCGUIRE asked Ms. Wing-Heier if she could provide clarification from Department of Law in short order. MS. WING-HEIER replied she'd try to get it this week. 2:57:11 PM SENATOR WIELECHOWSKI asked if the legislation was necessary as opposed to raising the cap to $1 million or $2 million. MS. WING-HEIER replied the Division of Insurance has not had the cap brought forward as an issue. She didn't know what Title 9 issues had been brought before the Department of Law. SENATOR COGHILL related that this legislation is an effort to respond to the changing world of investment and provide legitimate protections for people. MR. BAQUERO highlighted that the state collects 2.7 percent on life insurance policies that are below $100,000. He also mentioned other legislation he is carrying for the sponsor. SENATOR COGHILL stated that it's a legitimate point that the exemption can be penetrated for the right reasons. 3:02:15 PM CHAIR MCGUIRE announced she would hold SB 47 in committee for further consideration.