An amended version of the Viatical Settlements Model Act is headed up to the executive committee of the National Association of Insurance Commissioners.
Members of the Life Insurance and Annuities Committee at the NAIC, Kansas City, Mo., voted unanimously here at the NAIC’s winter meeting to approve the revised model.
To take effect, the model must be approved by both the NAIC’s executive committee and the plenary, the body that includes all voting NAIC members.
The version of the model approved by the Life and Annuities Committee prohibits entry into a viatical settlement contract “at any time prior to the application or issuance of a policy which is the subject of a viatical settlement contract within 5 years after the issuance of an insurance policy unless there are circumstances including: terminal or chronic illness from a viator or insured; the death or divorce from a viator’s spouse; or the viator’s retirement from full-time employment.”
The version approved by the committee states that there is an exception from the 5-year requirement if the viator enters into the viatical settlement contract more than 2 years after the date of the issuance of the policy, and, up until that time, policy premiums have been funded exclusively with unencumbered assets; there is no agreement or understanding with any other person to guarantee any such liability or to purchase or stand ready to purchase the policy; and neither the insured nor the policy has been evaluated for settlement.
Regulators changed the amended model during the meeting in response to concerns about the effects the changes might have on banks and other financial institutions.
“Don’t restrain the ability of banks to make loans for legitimate reasons,” said James McIntyre, who spoke at the meeting for the American Bankers Insurance Association, Washington.
Ohio Insurance Director Ann Womer Benjamin dealt with the concerns by introducing an amendment that states that using life insurance policy benefits as collateral for a bank loan does not create a viatical settlement contract.
Regulators adopted the amendment.
North Dakota Insurance Commissioner Jim Poolman, chair of the Life and Annuities Committee and author of the amended model, welcomed committee approval of the changes.
The revised model “surgically removes the cancer of [stranger-owned life insurance] and builds in consumer protections for people who decide to settle their contracts,” Poolman said.
Heidi Thomas, special counsel with the U.S. Comptroller of the Currency, said the OCC is studying the draft to see how it would affect banks.
Life insurance company and producer groups welcomed passage of the revised model.
Life settlement and life settlement groups said regulators ought to require life insurers to disclose that policyholders can sell their policies.
Brian Staples, who spoke for the life settlements industry, complained about the lack of a provision to deal with efforts by investors to use trusts to disguise the nature of deals with policyholders.
“We are sure that there are a lot of creative minds trying to figure out how to get around [the model], and we will have to continue to come back and address these issues,” Poolman said.
NAIC-funded consumer representatives including Brenda Cude and Birny Birnbaum said that there are worthwhile provisions in the model but that the disclosure section is too long and cumbersome to effectively reach consumers.
Sophisticated investors may simply recalibrate stranger-owned life insurance arrangements to incorporate the 5-year prohibition on policy sales, Birnbaum said.