An amended Viatical Settlements Model Act designed to stop the sale of life insurance policies initiated solely for the purpose of settling the contract was unanimously adopted by a key committee of the National Association of Insurance Commissioners here. Following a hearing and months of heated wrangling among life insurers, the life settlements industry and the life insurance financing industry, the model, with amendments offered by Ohio, was adopted by the Life Insurance and Annuities “A” Committee and will be advanced to the Executive Committee and plenary for consideration by the full NAIC body.
Calls for further examination of the issue by those testifying at the “A” Committee meeting were met by commissioners from Iowa and New York, among others, who responded that the issue had been thoroughly vetted and needed to be acted on.
After the vote, North Dakota Insurance Commissioner Jim Poolman, chair of the “A” Committee and author of the amended model, said, “It surgically removes the cancer of STOLI [stranger-owned life insurance] and builds in consumer protections for people who decide to settle their contracts.”
The amended model prohibits entry into a viatical settlement contract “at any time prior to the application or issuance of a policy that 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.”
However, the amendments also state that there is an exception to 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; with respect to the policy, prior to the 2 years after issuance, policy premiums are 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.
Additional language presented by Ohio Insurance Director Ann Womer Benjamin sought to clarify issues such as how the model would affect banks making a loan and taking a policy as collateral. The new language offered by Benjamin, according to a Dec. 10 memo, “plainly states that a loan by a bank in which the lender takes an assignment of the policy solely as collateral for the loan is not a ‘viatical settlement contract.’”
The issue concerned James McIntyre, counsel to the American Bankers Insurance Association, Washington, who urged regulators not to “restrain the ability of banks to make loans for legitimate reasons.”
Heidi Thomas, special counsel with the Comptroller of the Currency, Washington, said the OCC was examining the language in the draft to see how it affects banks. Poolman responded that he hoped the NAIC could work with the OCC on the issue.
Following the vote, Poolman said he believed Ohio’s language had addressed the concern about legitimate loans from banks. He added that if additional changes to the banking language are needed after working with the OCC, then that could happen before a full vote of the NAIC is taken.
Comments from interested parties ranged from life insurers and producers who reiterated their support for the model, to life settlement and life financing companies who asked that the model not be advanced. Consumer advocates said there were positive points in the model, but still expressed disappointment in the disclosure section of the document.
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 all expressed support for the revised model.
The Life Insurance Finance Association, the Life Insurance Settlement Association and the Life Settlement Institute all offered comments addressing the denial of consumer rights; the need to further discuss the model; the need to disclose that a life settlement is a viable option; and the fact that the model does not encompass the use of trusts in transactions that resemble life policies purchased solely for the purchase of settlements.
On the last point, Brian Staples, representing the life settlements industry, said there was concern that a “loophole” in the model would allow investors to agree to buy a policy on a person with a small amount of the death benefit going to beneficiaries and the rest to investors. This could be done through a trust, he explained. Staples said he was concerned that the industry will “migrate” to these transactions to avoid the law.
In response, Poolman said, “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.” If there is a violation, he added, “we will go after them.” Following the discussion and vote, Poolman reiterated that if abuses arise, “the issues can always be revisited.”
NAIC funded consumer representatives, including Brenda Cude and Birny Birnbaum, said that there are worthwhile provisions in the model but the disclosure section is too long and cumbersome to effectively reach consumers. Birnbaum said the disclosures in the model will not be effective. He also asked how a 5-year prohibition would address the problem of life insurance sold strictly for the purpose of settlement, adding that sophisticated investors will just calibrate their returns to incorporate the 5-year provision.