The Illinois Department of Insurance today stripped a producer of his insurance license and slapped him with a fine due to his involvement in a deflated trust that was intended to cover consumers' final expenses.
The agent, Edward L. Schainker, was slapped with the punishment after the state found that he had violated insurable interest laws and had failed to serve the interests of his customers.
The department alleged that from 1986 to 1999, Mr. Schainker, a registered representative with Merrill Lynch Life Agency Inc., recommended and sold more than 200 tax-exempt variable-universal-life-insurance policies as an investment inside a pre-need trust that was managed by the Illinois Funeral Directors Association.
The trust, which was intended to pay out prepaid funeral contracts belonging to 49,000 consumers, attracted the attention of the state's Department of Financial and Professional Regulation when its value fell from more than $300 million at the end of 2007 to about $250 million in less than two years.
An investigation by the department revealed that the association — the fund's trustees — were using the policies as an investment in the trust.
Aside from having his insurance license stripped, Mr. Schainker must pay up $100,000 and will be barred from applying for a new license for three years.
In connection with this case, Merrill Lynch Life Agency deposited $18 million into an account for the benefit of the Illinois consumers.
The IFDA's trust and the association have since been the subject of considerable controversy. State comptroller Dan Hynes had alleged in 2005 that the trust was underfunded by $39 million, and earlier this year he demanded that the IFDA pay up $10 million that it had allegedly siphoned from the trust through excessive management fees.
There have also been lawsuits involved, including one brought by six of the funeral directors against the association, charging that the IFDA had mismanaged the trust.
A previous version of this story incorrectly stated in the final two paragraphs that the Department of Insurance owned and mismanaged the IFDA's trust. The story has been corrected.
