Latest Reactions to Regulated Life Settlements

While analyzing what steps to take to restrict the sale of life insurance policies purchased only to be resold again, state legislators are closely evaluating the issue of life settlements.
Usually, in life settlement transactions, an elderly person sells a survivorship, whole, universal, variable, or term life insurance policy for a certain portion of the policy’s face value.

Percentages are based on life expectancy. Life settlement transactions are desirable because of many factors, including estate planning needs, rise in tax liabilities, a change of business, changes of coverage needs, or changes in life situations.

It is reported that at a recent meeting of the National Conference of Insurance Legislators (NCOIL), a discussion of the amended draft of the Viatical Settlement Model Act of the National Association of Insurance Commissioners took place. NCOIL sought insights from everyone present, given its forthcoming spring meeting review this March by the NAIC’s plenary and executive committee and plenary of the NAIC.

The NAIC has normally taken positions and made proposals on up to what and how the industry should be regulated. NCOIL is an organization of state legislators tasked to legislate and regulate the insurance industry for the best interests of the consumer public. Many of NCOIL’s members are either chairpersons or actual member legislators of various committees in charge of legislating insurance in their respective state houses within the U.S.

The life settlement industry, for more than a decade now, has worked closely with the NAIC towards the creation and enactment of reliable and sensible regulatory measures. Life settlement transactions have been prevalent for the past four or five years, but the industry has steadily grown and thrived within the past two years with institutional shareholders maximizing the value of these transactions and placing funding in many leading coverage businesses.

Taking it to the level of producers, it is feared that changes to the Model Act will increase processing time and workload. Further discussion seems in order for many points in the model law, particularly:

• Provision on “proof of financial responsibility” (via ownership of either certificates of deposit or securities, a deposit of cash, or a surety bond, or a combination of any of these, which is worth at least $250,000) before a license can be issued.

• Provision sustaining damages due to conviction of fraud or conviction of unfair practices, a failure to act, or a wrong deed committed by the viatical settlement broker or viatical settlement provider, then recovery using the surety bond for the aggrieved individual can be authorized by the model law.

• 5-year ban on the settlement of a policy

• Bond requirements – should a bond requirement be necessary for producers who have at least $2 to $3 million saved up for covering omissions and errors?

• Complexity of life settlements and how well do producers understand the issue

The NAIC draft’s definition of fraud was also tackled during the January 5 forum. Specifically, forum attendees discussed which provisions would cover instances where a provider or a viatical settlement broker – at any time during the first five years after the policy’s issuance – is not able to fully disclose to an insurance firm a transaction or series of transactions, or a plan connected to the business of viatical settlements.

The once hotly-debated question on whether life settlements should be treated as securities and likewise subjected to the appropriate regulation was also raised. Industry players say it’s part of the business while regulators stress that life settlement investments need to be controlled as securities.

In 2005, the industry was already making strides. Way back in 1996, the SEC sued Texas-based Life Partners, Inc. A federal appeals court concurred with Life Partners’ defense that it was essentially selling an insurance product. Hence, this ruling has been the industry’s precedent on their anti-regulation position.

The central theme of the forum revolved around the aspect of consumer protection, but ultimately, everyone agreed that the public should be free and able to talk with their agents concerning settlement options if ever their coverage policies don’t pan out the way they want to. For more efficiency, the model law should minimize participation from settlement brokers while growing the size of settlement offers for clients.

Source: InsuranceNewsNet.com