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 or less.

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 property insurance;

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 Insurance:

David Murphy - (217) 782-5415

5. Are percentage lease agreements still permissible?

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 lease agreement.

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 account.

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 policy.

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 loan application).

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.