Life insurance groups say states should strengthen insurable interest provisions in the National Association of Insurance Commissioners’ Viatical Settlement Model Law before adopting it.
The NAIC first adopted the model in 1993, and bills based on the model are pending in states such as California, Illinois, New York and South Carolina.
Originally, the model covered efforts to help terminally ill individuals sell their life insurance policies to investors.
Today, life settlement companies are using similar transactions to buy policies from elderly policyholders who have about 2 to 10 years to live.
Some speculators are trying to create new supplies of life insurance policies suitable for purchase, by using creative financing techniques to help unrelated consumers buy life insurance, then purchasing the policies from the consumers in 2 years, after the policy incontestability periods expire. In other cases, investors get access to the death benefits without formally purchasing the policies.
States should bar those kinds of investor-initiated life insurance arrangements, according to the American Council of Life Insurers, Washington; the Association for Advanced Life Underwriting, Falls Church, Va.; the National Association of Insurance and Financial Advisors, Falls Church, Va.; and the National Association of Independent Life Brokerage Agencies, Fairfax, Va.
“An unrelated third party should not be allowed to initiate a life insurance contract on a person’s life,” says AALU Chief Executive David Stertzer. “These transactions circumvent the intent of state insurable interest laws.”
“Initiation of death benefit protection is for parties with a personal, business or charitable relationship with insureds,” says NAILBA Chairman Matthew McAvoy. “It is an abuse of the product if stranger investors initiate coverage for the sole purpose of being enriched by the death of an insured.”
In addition to persuading states to alter their viatical bills, the insurance groups say they will work on amending the NAIC model.
The NAIC says it will conduct a special hearing on the issue with the help of the New York State Insurance Department.