The history of life settlements and viaticals
1980s: Viatical settlements and accelerated death benefits are invented in order to meet the financial needs of policyholders with AIDS who need to access immediate cash.
1995: Legislation passes that exempts viatical settlements and accelerated death benefits from federal income tax.
The Securities and Exchance Commission rules that viaticals are securities that require registration. (Life settlements may or may not be treated as securities depending on your state.)
The Viatical Association of America (VAA) is founded as a non-profit trade group for the viatical industry.
1996: Under HIPAA, viatical settlements are not subject to income and capital gains taxes. (Life settlements are.)
Late 1990s: With advances in HIV/AIDS drugs, the viatical market slows down. Life settlements evolve as a way to tap a new market.
2000: The National Conference of Insurance Legislators (NCOIL) adopts a Life Settlements Model Act outlining good business practices for the emerging industry.
The VAA changes its name to the Viatical and Life Settlement Association of America (VLSAA) to reflect the emerging life settlement market.
2001: The National Association of Insurance Commissioners issues the first Viatical Settlements Model Act defining good business practices such as licensing, prohibited practices, advertising guidelines, fraud prevention and unfair trade practices; it is up to each state to adopt the model law.
2004: NCOIL revises its Life Settlements Model Act.
The VLSAA changes its name to the Life Insurance Settlement Association of America (LISA), reflecting the shrinking market for viaticals.
2007: Investment banks create the Institutional Life Markets Assocations (ILMA), a trade group focusing on regulation and industry "best practices" for life settlements and other financial products.
LISA has about 150 member companies and estimates the settlement market to be 95 percent life settlements and 5 percent viaticals.
Thirty-five states have adopted the original NAIC model act. In June 2007, the NAIC passes a Viatical Settlements Model Act revision to address the burgeoning life settlement market. It strengthens consumers protections and addresses concerns about "stranger-originated life insurance" (STOLI) by imposing a five-year ban on settling life insurance policies. STOLI transactions involve the purchase of life insurance policies for the sole purpose of selling them immediately.
In November 2007, NCOIL passes a revision of its Life Settlements Model Act that also defines STOLI. It calls for a two-year moratorium on life settlements after a policy is purchased, as opposed to the NAIC's proposed five-year ban. The act outlines recommended provider and broker licensing and disclosures to policyholders. NCOIL's model act is an alternative to the NAIC's.
In December 2007, the U.S. Supreme Court declines to hear a case that challenged a state's right to regulate life settlements. The decision effectively means that regulation will stay with each state and not shift to federal oversight.
In November 2008, NCOIL reported that lawmakers in 20 states introduced legislation regulating and restricting life settlements and STOLI. Arizona, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Maine, Nebraska, Ohio, Oklahoma and West Virginia passed legislation. The laws extend the time before a person can sell the insurance policy, and also identify and deter STOLI transactions before a policy is issued.
In April 2009, Senate Bill 5195 (life settlements model act) was passed in Washington state. The bill requires licensing of any person who buys or brokers a life insurance policy from the owner if the owner is a resident of the state. It prohibits practices, disclosure requirements, and contractual provisions for life settlements and established sanctions for violations of the chapter.