The life settlement industry was born in 1911 when Supreme Court Justice Oliver Wendell Holmes Jr. and his fellow justices ruled that life insurance is private property and can be legally assigned by its owner. The decision came from a lengthy battle that began when John C. Burchard sold his life insurance policy for $100 to his doctor, Dr. Grigsby, and Dr. Grigsby agreed to assume the remainder of the premium payments (that were overdue already) in exchange for the death benefit. After Burchard’s passing a year later, the executor of this estate contested this transaction, and that’s when the case was brought before the highest court.
After the recession in 2008, more laws to protect policyholders, investors and insurance companies have been put into place, making the industry one of the most well-regulated and transparent financial transactions in the country, and ever more appealing to policyholders and investors alike. In fact, more regulations sparked an increase in life settlement activity.
Currently, forty-three states and Puerto Rico now regulate these transactions, and an estimated 90% of the entire US population is protected by comprehensive life settlement laws and regulations, which tend to focus on these top three protections:
Laws Governing Disclosure and Transparency
One of the most important laws in states across the country is designed to protect policyholders by ensuring that life insurance companies operate with transparency. A flurry of legislative action was spurred when one particular life insurance company raised premiums steeply and without much warning. One of their client’s $500,000 life insurance policy unexpectedly went up from $4,700 to $5,085 per year, due to a “cost of insurance” increase. Another’s $186.55 annual premium skyrocketed to $4,700 for $1.7 million worth of coverage. Many clients sued the company for “shock lapses” and “lack of disclosure,” and promptly canceled their policies or allowed them to lapse, with nothing to show for years of premium payments.
Stories like these were rampant throughout the industry. Hence was born the NCOIL (National Conference of Insurance Legislators) Life Settlement Model Act in 2007, requiring life insurance companies to disclose life settlement options to their clients, so that they were not forced to simply let them lapse or surrender them. These laws, now in force across thirty-two states [please confirm], stipulate that policyholders receive all offers and counteroffers in a life settlement, as well as any alternatives to settlements and the risks incurred with taxes and government assistance. They also require that life settlement companies and brokers be licensed, with a fiduciary duty to their clients. Twenty states include provisions of NCOIL, providing this type of coverage to about 53% of the country. Additionally, twelve states have a hybrid of the NAIC (National Association of Insurance Commissioners) Viatical Settlements Model and the NCOIL Model, affording an additional 12% coverage.
In 2010, the law went further when six states also incorporated the NCOIL Life Insurance Consumer Disclosure Act to mandate that insurers provide written notice to policyholders facing a lapse or surrender of their policies. These states are Washington, Wisconsin, Oregon, Maine, Kentucky and New Hampshire. Laws governing transparency all have an added benefit since they give seniors an option to receive a lump sum of cash when they may most need it for medical expenses, thus taking some of the pressure off of Medicaid programs.
Laws Governing Waiting Periods
Another important focus of life settlement laws has been regarding waiting periods. Thirty states have laws requiring that policyholders wait at least two years before selling a recently purchased life insurance policy. Eleven states stipulate that sellers must wait five years, and just one state (Minnesota) requires a four-year wait. Most have provisions where eligible people can bypass these laws if they are terminally or chronically ill, retiring, getting a divorce or if they meet other conditions. These laws were put into place to protect the insurance companies so that people weren’t motivated to buy life insurance policies with the intent to quickly turn them around and try to sell them for a profit. You can see where your state’s waiting period in this map.
Laws Governing STOLI
STOLI, or Stranger Originated Life Insurance, refers to a situation wherein someone who is not in a loving relationship (ie. father/daughter, spousal) purchases a life policy as an investment and not an insurance vehicle for someone. If they don’t have an insurable interest since they’re not linked with that person, it’s considered a STOLI, and it’s been considered illegal since July 1, 2010. Since 2007, twenty-nine states have adopted new laws to specifically define and prohibit STOLI. In many states, regulators also make it clear to consumers that a life settlement is not the same thing as STOLI.
Since each individual state maintains its own laws governing the life settlement industry, it’s always best to consult your particular state’s laws to avoid life settlement fines and penalties. It’s never been a better time to be involved in this industry, and protections continue to grow stronger and more comprehensive, which benefits policy holders, the insurance companies and everyone involved. To stay on top of life settlement industry updates, follow our news and blog sections.