Frequently Asked Questions
about Banks Selling Insurance
Beginning October 1, 1997,
Illinois state-chartered banks and trust companies obtained the authorization
to sell insurance. We have listed below some of the most common questions
that banks have raised with our office concerning this new power.
1. Can all banks and trust
companies sell insurance?
All Illinois state-chartered
banks and trust companies, including foreign banking offices, may sell
insurance from any location in Illinois. National banks may not sell
insurance unless they are located in places with populations of 5,000
Illinois banks which have
interstate branches may also sell insurance from their out of state
branches (if the other state permits banks to sell insurance) provided
that they meet the licensure and consumer protection provisions of the
other state. If the other state does not permit its banks to sell insurance,
then the Illinois bank would be limited to selling insurance in places
with populations of 5,000 or less.
2. What types of insurance
may banks and trust companies sell?
Banks may sell all lines
of insurance including life, accident, health and casualty.
The following types of insurance
are not covered by this new legislation and banks may continue to provide
those services as they have before:
a) credit life, credit accident
and health, credit involuntary unemployment, credit casualty and credit
b) extended service contracts
and warranty agreements;
c) insurance obtained by
the debtor to provide payment for the difference between the remaining
balance on a loan or other extension of credit and the amount of insurance
coverage on the collateral securing the loan or other extension of credit;
d) insurance placed by a
financial institution on collateral used in connection with a loan or
other extension of credit when a debtor breaches the contractual obligations
to provide that insurance; and
e) private mortgage insurance
and financial guarantee insurance.
3. What structure must financial
institutions establish to sell insurance?
Insurance may be sold directly
from the bank or trust company or the institution may create a separate
subsidiary. If insurance activities are to be conducted directly in
the financial institution, its insurance activities must have been approved
by the board of directors of the institution and it must be performed
through a separate department which is identified on the bank's or trust
company's organization chart. Separate books and records must be maintained
with respect to the institution's insurance activities.
If a state-chartered bank
sells insurance from a separate subsidiary, the bank must file a "Notice
of Intent to Establish a Bank Subsidiary" form with our office 60 days
prior to establishing or purchasing the subsidiary. A trust company
must file an "Application to Establish a Corporate Fiduciary Subsidiary"
form and receive approval from the Commissioner 60 days before it begins
the operation of the subsidiary.
We anticipate that most institutions
will conduct their insurance activities through separate subsidiaries
rather than through the bank or trust company directly.
4. What type of licensure is
required for an institution to begin selling insurance?
Individual employees who
sell insurance must apply for and receive a "producer's license" from
the Illinois Department of Insurance.
A bank or its subsidiary
that sells insurance must be licensed by the Department of Insurance
as a "registered firm".
For licensing information,
you may wish to contact the following individual at the Division of
David Murphy - (217)
5. Are percentage lease agreements
Yes. A financial institution
may still enter into percentage lease agreements by which insurance
is sold on its premises and the financial institution receives as rent
a percentage fee based on sales of insurance by the lessee.
Separate licensure of financial
institution employees or the filing of notices is not required if the
insurance activities are conducted by a third party through a percentage
6. What specific consumer protection
requirements apply when financial institutions sell insurance?
a) Financial institutions
which sell insurance or which permit insurance to be sold on their premises
through percentage lease agreements must clearly disclose to the customer
in writing at the time of the written application, or at closing if
no written application is obtained, and post a sign clearly displayed
in the area where applications for loans or other extensions of credit
are being taken or closed which reads:
"You may obtain insurance
required in connection with your loan or extension of credit from
any insurance agent, broker, or firm that sells such insurance. Your
choice of insurance provider will not affect our credit decision or
your credit terms."
b) Financial institutions
cannot delay or impede the completion of a loan transaction or other
transaction involving the extension of credit in an attempt to influence
the customer's selection of any insurance producer. This does not mean
that the financial institution cannot delay the transaction until proof
of insurance is received, but it cannot delay it just to force the customer
to purchase insurance from the lending institution.
c) Financial institutions
cannot offer banking products or services, or vary the terms, on the
condition or requirement that the customer obtain insurance from the
financial institution or any affiliate; and financial institutions must
not require that the customer purchase insurance from a specific firm
or producer in order to obtain credit or to establish a deposit or trust
d) Financial institutions
cannot offer rebates on insurance products or discounts on loans as
incentives for the customer to purchase insurance.
e) Financial institutions
cannot require as a condition of providing any product or service or
renewal of any contract for providing a product or service to any customer,
that the customer acquire, finance or negotiate any policy or contract
of insurance through a particular insurer or reject insurance in connection
with a loan solely because the policy was issued or underwritten by
someone not associated with the financial institution. Financial institutions
may not discriminate against insurance producers not associated with
the financial institution; no added charge for the processing of insurance
related to a transaction may be charged unless (1) the financial institution
is the registered firm providing the policy, (2) the charge is uniformly
applied regardless of whether the financial institution is the registered
firm, or (3) the charge is authorized by State or federal law.
f) Financial institutions
must disclose in all marketing materials that insurance is not a deposit,
are not FDIC-insured, is not guaranteed by the financial institution
or an affiliate, and, where appropriate, involves investment risk.
This disclosure is similar
to the disclosures on the sale of non-deposit investment products that
are required with respect to the sale of mutual funds.
g) Financial institutions
cannot use misleading advertising suggesting that the State or federal
government is responsible for the insurance transactions or that the
financial institution, the State or the federal government guarantees
returns or is a source of payment of obligations under an insurance
h) Financial institutions
cannot pay, and unlicensed individuals cannot accept, any commission,
fee or other valuable consideration for insurance producer services
if the individual providing the services is not validly licensed.
i) If a financial institution
requires insurance in connection with credit, and offers that type of
insurance either directly or through an affiliate, it must disclose
in writing that the borrower may obtain insurance from any agent, broker,
or firm that sells the insurance and the borrower's choice will not
affect the credit decision or terms (exception: mass mailing by the
financial institution where solicitation is not related to a specific
j) In banks or branches having
at least $100 million in deposits, insurance related to a loan cannot
be sold from the same desk or by the same officer where/by whom the
loan was handled. As an example, this restriction would not apply to
the branch of a $1 billion bank if the branch at which the insurance
related to the loan was sold maintained less than $100 million in deposits.
As a second example, even at a bank or branch office with more than
$100 million in deposits, the same loan officer who handles a residential
mortgage loan application could sell the borrower an auto insurance
policy, since the auto insurance was not related to the mortgage.
k) Signs concerning the availability
of insurance on a financial institution's premises must be clearly displayed
in the area where loan applications are taken and must contain a disclosure
similar to the one referenced in (i) above.
l) A financial institution
must not release a customer's insurance information to any person outside
of the financial institution or its affiliate without the customer's
written consent (exceptions: customer's name, address and telephone
number contained in bank's records; or the release of insurance information
authorized by State or federal law). The financial institution must
not require premium information when requiring evidence of insurance
in connection with a loan and shall not use such premium information
to solicit insurance without the customer's written consent. The financial
institution may not use health information obtained from insurance records
for non-insurance purposes.
For example, if the customer
advised the financial institution insurance salesperson that the customer's
spouse had a terminal illness, that information could not be shared
with the bank loan officer in making a decision about granting credit.
7. Who will examine the financial
institutions' insurance activities?
The Commissioner's office
will examine state banks and trust companies to assure compliance with
the specific provisions of the insurance code which relate to banks
(e.g., anti-tying, signage requirements, etc.).
8. Is the sale of annuities
covered by this new legislation?
A recent United States Supreme
Court decision ruled that variable rate annuities are investment products,
rather than insurance products. Technically, banks do not have to register
as an insurance producer if they exclusively sold variable rate annuities;
however, it may be in the bank's best interest to do so.
Fixed rate annuities are
considered to be insurance products and thus financial institutions
must register and obtain the appropriate licensure.
The Commissioner's office,
the Department of Insurance and the various representatives of insurance
companies, insurance agents and financial institutions continue to meet
to iron out some technical issues of the new legislation. Some issues
may require that hearings be held to make final determinations. As specific
answers to more technical questions are determined, we will keep you informed.
Please feel free to direct
questions concerning the sale of insurance to your bank's District Supervisor
or one of the members of our legal staff.