States should not enact the National Association of Insurance Commissioners’ Viatical Settlement Model Law without changing it to bar speculative use of life insurance, say groups representing life insurers and agents.
The American Council of Life Insurers, the Association for Advanced Life Underwriting, the National Association of Insurance and Financial Advisors, and the National Association of Independent Life Brokerage Agencies expressed their opposition to the model law, which was first adopted by the NAIC in 1993.
Legislation based on the model law is pending in several states, including California, Illinois, New York and South Carolina. The model law originally was crafted to regulate the viatical settlement industry, in which terminally ill individuals sell their life insurance policies to investors, but the life groups say it contains a loophole allowing for speculation.
“We supported the model to make viatical settlement agreements available to policyholders with terminal illnesses who were in need of funds for medical expenses,” said Frank Keating, ACLI president and CEO. “The model provides important disclosures and protections to consumers at a very vulnerable time in their lives.”
The groups noted that the growth of viatical settlements has led to the development of other arrangements in which investors who do not have an insurable interest are initiating life coverage on older people with no health problems and paying the premiums for the coverage. Once the policy’s two-year incontestability period expires, control of the policy is shifted to the investors, who would then collect the death benefit.
“An unrelated third party should not be allowed to initiate a life insurance contract on a person’s life,” said David Stertzer, CEO of AALU. “These transactions circumvent the intent of state insurable interest laws. When a life insurance policy is purchased, it should be intended for the benefit of a person who has a relationship to the insured and an economic interest in his or her longevity.”
The schemes are designed to avoid state insurable interest laws by changing control of the policy two or three years after the policy is issued, when those laws no longer apply. In another version of the arrangement, the groups said, an arrangement is made to provide the death benefit to the investors without formally transferring control of the policy.
David Woods, CEO of NAIFA, called these arrangements “abuses of the purpose of life insurance, which is the cornerstone of financial security for millions, enabling families to protect their loved ones and businesses to plan for the future with confidence.”
In addition to fighting efforts in the states, the groups said they would also encourage efforts to amend the model law itself. The NAIC has announced it will conduct a special hearing on the issue through the New York Insurance Department in New York.
“Initiation of death benefit protection is for parties with a personal, business or charitable relationship with insureds,” said 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. We will oppose any legislation that fails to reinforce this fundamental concept in life insurance law.”
The New York department recently noted that insurable interest was lacking under existing law, saying in a ruling that “it appears that the arrangement is intended to facilitate the procurement of policies solely for resale.” (See NU, Feb. 20.)