Life settlement law

Lawmakers are taking action to regulate the exploding market of life insurance settlements.  On October 25, 2007, lawmakers gathered with various industry executives in Chicago to discuss a Life Settlements Model Act.  The convention adjusted and tweaked the draft prepared by the National Conference of Insurance Legislators (NCOIL).

Organizers and those promoting the act hope to have it adopted in November at the NCOIL annual meeting.  In preparing the document, NCOIL has considered the recommendations of many industry research teams and watchdog groups, including the American Council of Life Insurers (ACLI), the Association for Advanced Life Underwriting (AALU), the National Association of Insurance and Financial Advisors (NAIFA), the National Association of Independent Life Brokerage Agencies (NAILBA), the Life Insurance Settlement Association (LISA), the Life Settlement Institute (LSI), the Life Insurance Finance Association (LIFA), and the North American Securities Administrators Association (NASAA).

At this most recent meeting, participants elected to eliminate most sections on misrepresentation and false representation (which some experts name as potential problem areas in the new industry).  An entire section (Section 14 of 18) of the act dealing with false representations and deceptive words was knocked out.  In addition, half of section 10, which dealt with misrepresentation, was deferred for later consideration.

Most of the stricken sections of the draft dealt specifically with “a Person in the advertisement, offer, or sale of a Purchase Agreement” claiming that the agreement has been “guaranteed, sponsored, recommended, or approved” by state or Federal governments.  NCOIL decided to narrow the focus of this effort to the securities regulation of life settlements.

Most of the document consists of background, definitions and recommendations.  Section 11, “General Rules,” gives a few basic procedural regulations.  For example, when a life settlement company requests verification from a life insurance company that a potential client is indeed a policyholder, the insurance company is allowed 30 days to respond.  In the same section, life settlement companies are regulated in their part, restricted in their recruitment of policyholders who purchased within the last two years.

As a matter of course, NCOIL steers away from intense and comprehensive regulation in favor of establishing legal foundations.  All the terms, from “broker” to “chronically ill” to “financing entity” are defined legally as they apply to legislation of life settlements.

Definitions and background are a necessary part of the process because the life settlement industry is as large and unregulated as any in the country, since it’s so new.  There are no laws on the books because life settlements have entered the public consciousness and changed the market so recently and so quickly.

Viatical settlements have existed for some time now—terminally ill patients selling their policies for less than face value in order to settle payments for care and final arrangements.

Life settlements, on the other hand, are a relatively new development.  Life settlements are policies sold by a policyholder who is not terminally ill.  Generally, these policyholders are those who no longer need life insurance: perhaps their children have graduated from college, perhaps their investments have accumulated enough to provide self-insurance.   In any case, a growing number of life insurance policyholders are deciding that they would rather have most of the money now than all of the money later.

Unsurprisingly, a demand market has sprung up in response, a multitude of investors eager to snap up policies at a portion of their face value.  As a result, the market has grown at breakneck speed over the past two and a half years.

Now legislators at NCOIL are playing catch-up.

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