Life Settlements; Two Sides to the Issue
By Kate Kinkade, CLU, ChFC

There has been so much focus on one side of life settlements – the “Investor Owned Life Insurance” that we tend to forget how they started; to generate a legitimate market for unneeded life insurance policies. Several states have been working on passage of legislation aimed at restricting the purchase of life insurance with the sole intent to sell to a third party. Only California has included language that considers the other side of the story: encouraging consumers to get the most for their unneeded life insurance policies.

Insurance carriers are concerned with the effect of stranger owned life insurance (-STOLI) on the pricing of life insurance for seniors due to the conflict with “normal” lapse assumptions.  Model legislation has been written to identify policies purchased with the intent to sell is being considered by the states. Supporters of such legislation have generally not considered protecting consumers with a legitimate need to sell a policy. They might be more cautious on what type of regulation they promote if their parent had a policy that would produce twice as much for them in the secondary market as the surrender value they would receive. 

California is among the states that is considering legislation of life settlements. The state senate finance and banking committee recently passed S.B. 1224, which will now go to appropriations and then the full Senate. It is a version of the NAIC/NCOIL model legislation that is being considered by many states (see below.) The bill, as passed by the committee, is acknowledged as being incomplete and in need of refinement.

This bill includes a provision that requires a life insurance company to send a written notice to the owner of a policy that there may be an alternative to a policy surrender; or to the accelerated death benefit, or to using the policy as collateral for a loan. In other words, if an owner were seeking to cash out a policy the insurance company would be required to send them to a financial advisor to consider a life settlement. The provision doesn’t state that life settlements are to be considered, but it is clearly directed at a settlement as an “available alternative” to the surrender, loan, etc.

Here is the balance in the life settlement issue: let’s not create a market on lives (buying life insurance on strangers for financial return) but let’s create a market for unneeded life insurance policies. If a buyer is willing to pay more than the surrender value for a -policy, perhaps the carrier should meet the price. In either case, why shouldn’t the owner get the benefit of the best value for a policy he or she has been paying premiums on for years?

We all know that the death benefit on a life insurance policy is probably the best financial leverage one can receive; but the benefit doesn’t go to the insured; it goes to a beneficiary. Here is a means of getting the maximum leverage for the insured/owner as opposed to another individual. 

It will be interesting to see if the language remains in the bill when if comes up for a vote and if it is passed. One would assume insurance companies oppose the requirement and they are a stronger lobby than the life settlements industry. While this is essentially a consumer protection issue, few consumers understand the issue well enough to weigh in. This will be a battle between interest groups unless legislators strongly take on consumer interests.

For professional agents with client welfare in the forefront, the life settlement is another option in our advisory basket. When appropriate, life settlements make a lot of sense. We don’t need a law to tell us when we should be introducing the concept; that’s our job. This provision in legislative form would protect those who aren’t lucky enough to have professional guidance. 
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NOTE: One of the catalysts to the introduction of these state initiatives was the National Association of Insurance Commissioners’ (NAIC) adoption of the Viatical Settlements Model Act in June 2007.  The National Conference of Insurance Legislators (NCOIL) also adopted its own version of the Life Settlements Model Act in November 2007 in response to concerns regarding provisions contained within the NAIC Model Act.  While the Life Insurance Settlement Association (LISA) endorsed the NCOIL Act upon its adoption, the trend shows more than 12 states have introduced legislation in 2007 mimicking the restrictions in the NAIC Model, as compared to the six states following the lead of the NCOIL Model.  The remaining bills contain a compilation of each act or approach regulation in an entirely different manner.

Both the NCOIL and NAIC acts share some similar characteristics, but there are substantial differences causing concern in the life-settlement industry regarding potential conflicts with banking and securities laws, as well as impact to the life-settlement industry.  This includes prohibition to enter into a settlement contract at any time prior to the application or issuance of a policy within a five-year period with no exception for charities, employment termination or decrease in income; and graded sentencing requirement ranging from 20 years imprisonment and a fine of $100,000 to one year imprisonment and a fine of $3,000 for violations of the act.