The secondary market for life insurance caught a good deal of attention in 2009 from legislatures, regulators and the news media.
The increased awareness may have stemmed at least in part from the considerable growth of the life settlement industry. Life settlement companies have paid policy owners more than $10 billion over the past 10 years, which was $6 billion to $7 billion more than the cash surrender value of their policies, according to an estimate by the Life Insurance Settlement Association, Orlando, Fla.
Currently, 39 states regulate life settlements, LISA says.
Among states adding regulations on life settlements this year was Washington, where Gov. Christine Gregoire signed a law in April based on model life settlement legislation from the National Conference of Insurance Legislators, Troy, N.Y.
Significantly, Washington's law requires that life insurers notify insureds age 60 and up who are seriously or terminally ill that they have alternatives to giving up or cashing in their policy.
Doug Head, executive director of LISA, noted that this was the nation's first law requiring insurers to disclose the settlement option to policyholders as an alternative to cashing in or lapsing a life policy.
Washington's law also specifies that life insurance policy owners may not enter a settlement agreement within 2 years of receiving their policy. It also requires that policies settled within 5 years of issuance be reported to the state Office of the Insurance Commissioner.
Also, in April, North Dakota enacted H.B. 1284, strengthening a state law prohibiting stranger-originated life insurance transactions.
As in other states enacting similar laws, North Dakota defined STOLI contracts as fraudulent transactions in which financial speculators persuade a senior to buy life insurance with the specific intention of transferring the death benefits to the speculators.
North Dakota's law allows life insurers to ask policy application questions that would help underwriters spot STOLI deals. Another provision restricts use of some premium-financing arrangements typically associated with STOLI.
The law also requires settlement producers to give cost information and other relevant information to seniors considering life settlement transactions, and it requires them to submit information about their deals to the state insurance department.
Minnesota's viatical settlements law went into effect Aug. 1. It modified existing statutes regulating settlements and required that brokers or providers must be licensed by the state where the person who is selling the life policy resides.
Minnesota's law imposes restrictions on selling policies within 4 years after purchase. It also says that a licensed insurance agent in good standing may operate as a viatical settlement broker. In addition, it sets grounds for a settlement license to be suspended or revoked and for refusing to issue a license.
In August, Illinois Governor Pat Quinn signed a law prohibiting STOLI and aiming at protecting consumers who enter into viatical settlements in the state.
The law imposes disclosure requirements and licensing and ethics standards on viatical and life settlement providers.
In October, California Gov. Arnold Schwarzenegger signed a bill banning STOLI in the state and prohibiting policy owners from entering into a life settlement for 2 years after a policy is issued.
Although the law was praised by LISA, the American Council of Life Insurers, and other industry groups, it disappointed some in the industry.
The California Life Settlement Association said it opposed the law because it failed to require life insurers to notify policy holders that life settlements are an alternative to lapsing or surrendering their policies.
In November, New York Gov. David Patterson, D, signed S. 66009, a life settlement regulation bill that was also based on the model act developed by NCOIL.
The law establishes disclosure requirements, privacy protections and rescission rights. It also requires licensing of settlement companies and provides for their oversight by the New York insurance department. The law bans STOLI and provides several tools for insurers and life settlement companies to detect and prevent STOLI. It also imposes penalties for those engaging in such transactions.
Also in November, the Life Settlements Act was passed in Rhode Island without Gov. Donald Carcieri's signature. The law, which takes effect July 1, 2010, bars STOLI deals. It also requires brokers to disclose compensation and other information to policy owners. In addition, it mandates that life settlement companies seeking to do business in Rhode Island register and pay a fee to the state's Department of Business Regulation.
Other states adopting bills that seek to eliminate STOLI this year were Nevada and Vermont, which both limited the ability of policyholders to sell policies within 5 years after they have purchased the policies.
The industry scored a victory in Ohio in February, when the state's Ohio Department of Insurance withdrew its demand that brokers provide detailed information about life settlements they completed in the state.
