The life insurance industry has recently embraced providing coverage for cannabis users with major carriers beginning to leapfrog one another with increasingly competitive standards. It is common to see ‘preferred’ health classifications for those who purport to use marijuana a dozen or more times a month. This comes as no surprise as 30 states, the District of Columbia, Guam and Puerto Rico have enacted comprehensive public medical marijuana programs. Eleven states and the District of Columbia have gone further and enacted legislation authorizing the regulated sale and adult use of recreational cannabis. If the use of cannabis is becoming acceptable to life insurance companies, why is it virtually impossible for active and even passive investors in the cannabis industry to find coverage? Whether the investor is classified as ‘plant-touching’ and owns cannabis farms, transportation or dispensaries or the investor is ‘non-plant-touching’ and makes passive investments into the cannabis industry by investing in funds or otherwise providing capital, these individuals are almost always declined when applying for life insurance.
Why Life Insurers Say “No”
Despite the growing roster of friendly state laws, due to existing and pending federal laws and regulations, life insurance companies have two major impediments to providing coverage to these investors: fear of being charged with a felony and the inability to meet anti-money laundering (“AML”) regulations. The federal Controlled Substances Act of 1970 classifies marijuana as a Schedule 1 Drug. Therefore, regardless of a state program, it remains illegal at the federal level to “manufacture, distribute, or dispense, or possess with intent to manufacture, distribute or dispense” marijuana or “aid and abet” that activity.
“Before an underwriter can even consider protocols for covering cannabis industry-related individuals, a carrier’s legal and compliance departments must sign-off,” says Tammy Marlotte, a senior underwriting consultant and former chief underwriter for Lombard International Insurance. “The Schedule 1 classification means, technically, officers at a carrier could be charged with a felony for entering into a financial transaction with these clients.”
The ability of the federal government to enforce this law is muddled and constantly changing, adding more uncertainty to a carrier’s ability to change its position. Dating back to 2001, the Joyce-Leahy Amendment (f.k.a Rohrabacker-Far Amendment) prohibits the Department of Justice from spending any money to enforce any law that interferes with a state’s implementation of its own medical marijuana laws. This Amendment has been repeatedly renewed and also aims to prohibit the Drug Enforcement Agency from spending funds to arrest state-licensed medical marijuana patients and providers.
The Courts and the Obama and Trump administrations have also taken steps to relax potential enforcement. The Ninth Circuit Court held in 2016 in United States v. McIntosh, 833 F.3d 1163, 1179 n.5, that Department of Justice funds cannot be used to prosecute participants in compliance with a state medical marijuana program because of the Rohrabacher-Blumenauer Amendment. President Obama issued the Cole Memorandum directing the use of prosecutorial discretion not to prosecute state-legal cannabis activity. Despite Attorney General Jeff Sessions repealing the Cole Memorandum in 2018, new Attorney General William Barr stated in a letter to U.S. Senator Cory Booker of New Jersey on January 15, 2019, “I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum.”
Following the Money
At the underwriting level with life insurance carriers, the cash nature of the cannabis industry causes headaches with AML compliance. “It is difficult to track money so verifying a client’s finances and the source of funds for premium is next to impossible,” says Marlotte who has issued over a dozen underwriting declines to cannabis investors based upon the inability to gain a clear financial picture.
Chris Anderson is a founding partner and general counsel for Calyx King Consulting in Seattle and provides professional services to the cannabis industry. Anderson is an expert on the financial side of the cannabis industry and has personally found it difficult to obtain life insurance coverage. “Even though there are some state banks and credit unions willing to offer banking services to the cannabis industry, it is still largely a cash business. Short of showing up to an insurance company’s home office with a bag of money, how do I prove my finances to the satisfaction of the underwriter?”
When it comes to source of funds used to pay the premium, cash or not, the carrier is likely still uneasy about the potentially implied criminal involvement of ‘aiding and abetting’ under the Controlled Substances Act. Currently, there are insufficient measures in place to satisfy knowing the premium is coming from non-cannabis money the insured has segregated and, often, even this conscientious segregation is not enough to satisfy a carrier’s existing compliance standards.
As for Anderson, his difficulties with obtaining coverage are amplified since he not only provides consulting services for the marijuana industry but also owns several cannabis farms in the U.S. and Latin America, including the House of Cultivar brand. “Even though my primary duty is to ensure that my business and clients’ interests are in full compliance with state and local laws where I operate, I kept hearing from life insurance companies that there was a financial underwriting concern with the premium money I would send from my credit union.”
Enforcement or Not
Questions arise as to why passive, non-plant touching investors are generally treated the same as active investors. Until the advent and adoption of electronic inspection reports (“EIS”), the passive investments of life insurance applicants went unnoticed. For example, a client may not even be aware they are invested in a fund or REIT which, itself, invests into the cannabis industry. The investment may just be a part of a well-diversified portfolio. The EIS quickly and thoroughly sweeps public records and, more often than traditional inspections, turns up passive investments.
The resulting decline from an underwriter can come as a surprise to these investors. Though, this may seem punitive in nature, an underwriter may consider the size of the investment or the size of the cannabis portion of an investment when deciding if the applicant falls into the cannabis investor classification. A client investing $10,000 into a mutual fund which has one of its hundred positions in cannabis is unlikely to be a concern.
Just as with the Controlled Substances Act, there are federal non-enforcement measures in place regarding potential financial crimes related to the cannabis industry. The U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”), in 2014, issued guidance to prosecutors not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses so long as that business is legal in their state and none of the federal enforcement priorities referenced in the Cole Memorandum are being violated. This FinCEN Guidance has laid out specific steps financial institutions can follow to comply with the Bank Secrecy Act.
“Right away, you notice this is just ‘guidance’ and if you understand how an insurance company operates, you’ll see there are more challenges for carriers in this space,” says Jay C. Judas, the CEO of Life Insurance Strategies Group, a Boston-based consulting and advisory firm providing services to the high-net worth life insurance industry. “I can understand carriers remaining squirrelly to provide coverage in light of all the non-enforcement provisions. Most carriers operate in both cannabis friendly and unfriendly states and many offer variable products which fall under federal, not state, securities laws. Whether an insurer is owned by shareholders or policyholders, the management of the insurer has a duty to these owners to not commit crimes and the state of current laws and regulations does not exactly provide certainty.”
There are some potential workarounds life insurance companies are in the early days of embracing. Addressing the source of funds concern is one area targeted to improve the ability to make underwriting offers and issue a policy. There are a handful of carriers who will accept evidence that the source of funds used to verify an applicant’s finances and to pay the initial and future premiums are walled off. Often difficult to demonstrate, an applicant must show that their financial picture being relied upon to prove insurability does not include any money from the cannabis industry.
Owners of traditional drug stores are increasingly found to operate marijuana dispensaries due to their experience and infrastructure in the medicinal products field. Such an owner applying for a life insurance policy would need to keep his drug stores completely financially separate from the dispensaries when applying for and paying for life insurance. This could be problematic in situations where the policy is approved and issued but the client cannot sufficiently prove the money for future premiums is ‘walled off’ and then the policy underperforms or lapses when the insurer cannot accept payment.
Perhaps the simplest method for carrier acceptance is when a client conducts an IRC §1035 exchange of an existing policy for a new one. The funds for the policy are coming from another insurance company and not from the applicant so the money is perceived as ‘clean.’
Obviously, only a low proportion of new policies are a result of a 1035 exchange so other techniques are slowly being utilized. Having a trust which was seeded with funds some time ago own and pay for the policy is one path finding success. The funds in the trust still need to be shown to have come from a non-cannabis source but trust ownership may address another compliance concern. Carriers are reluctant to permit personal ownership of policies by cannabis investors. The close proximity of a cannabis industry-related individual to the control of the policy raises concerns. Withdrawals and loans could be requested which may find their way into the cannabis industry so having an independent trustee making policy decisions provides some comfort.
Another technique cannabis investors are finding increasing success with is utilizing premium loan financing to pay for their policies. Typically involving a high net-worth client and a large policy, premium loan financing is when a client’s bank or a third-party lender loans most of the premium to pay for the policy. The client pays interest on the loan and posts collateral to back the balance of the premium not provided by the loan. Premium loans may be obtained annually or one-time in instances where clients wish to pay for the policy all at once.
Christopher Daniels, CFP, CLU, ChFC, is the president of Charlotte-based Midnight Financial Group, a provider of premium loan financing services to both producers and life insurance clients. “I’d say we are getting there in terms of acceptability but there are a number of things to consider. First, most lenders will not loan to an individual listed on the Marijuana Related Business (“MRB”) List. This is a Dow Jones service which has some criteria to assess marijuana cultivators, processors, testing facilities, transporters and dispensaries.” Daniels says if the applicant is not on that list, lenders may not conduct additional screening related to cannabis.
Other areas of concerns lending banks have include understanding how much of the client’s net worth is related to cannabis investment, can the client qualify for a loan without relying upon cannabis finances and is the interest and collateral paid from unrelated cannabis assets. “Previously established trusts to own the life insurance policy have been very helpful for our clients when the trusts already contain assets and funds sufficient to handle the collateral and interest,” reports Daniels. “It comes as no surprise that banks would prefer to have a fully secured loan without personal recourse and held within the life insurance trust.”
Progress is not just limited to workarounds by carriers and banks. A path forward toward not treating cannabis industry individuals any differently than other life insurance applicants is being laid out in Congress with some recent good news related to the Hemp Industry. On December 3, 2019, federal and bank regulators announced they were scrapping a complex requirement that banks treat their hemp customers as suspicious and file to AML authorities each time there was a transaction.
Hemp products are made from the same plants that produce marijuana. However, they are grown to have less tetrahydrocannabinol (“THC”), the chemical that produces a high, and are used for fabrics and oils but cannot be made into consumables. The recent announcement comes on the heels of Congress legalizing hemp as a crop last year and directing the U.S. Agriculture Department to start regulating hemp production. Could this spell positive changes for treatment of the cannabis industry?
It looks that way. “We are carefully watching both Congress’ SAFE Banking Act and the MORE Act as they would dramatically help our members,” says Rocco Petrilli, the chairman of the National Cannabis Risk Management Association (“NCRMA”). Formed to source general insurance solutions to its 2,000 members, the NCRMA provides a broad range of risk management tools to the cannabis industry as well as vetting general insurance solutions and brokers. The life insurance industry does not currently have a similar advocacy association.
The U.S. House of Representatives passed the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”) in September and the bill is sitting with the Senate Banking Committee where no action has been taken yet. The SAFE Act prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate marijuana-related business.
Similarly, in November, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act (“MORE Act”). The MORE Act decriminalizes marijuana at the federal level and removes the substance from the Controlled Substances Act. Action by the full House is pending and then the bill must move to the Senate.
Petrilli is constantly assessing external threats to his members and federal law is at the top of the list. “Having marijuana removed as a Schedule 1 Controlled Substance is a game-changer. Let’s see if these Acts move along. What we can do in the insurance industry to help is to support the continued development of clinical data to show that marijuana is a very acceptable substance for the treatment of many medical conditions.”
The Future Is Bright
While cannabis users are enjoying being able to obtain large sums of life insurance coverage with little or no more underwriting penalties than non-users, this isn’t true for cannabis investors. Logically, one would think this would be the other way around. The patchwork of state and federal laws has made it difficult for life insurance companies to serve these investors but there is light at the end of the tunnel. Quickly changing federal laws, more states legalizing cannabis and insurers undertaking innovative methods to be able to issue policies could see this matter resolved in the near future.
Tiffany Hyde, FALU, leads Lion Street’s Underwriting Division and is a member of the firm’s Executive Leadership Team.