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NCOIL Prepares For Life Settlement Discussion

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The debate about whether policyholders should have to wait 5 years or just 2 years to sell life insurance policies is just one of the topics likely to surface at the spring meeting of the National Conference of Insurance Legislators.

Members of NCOIL, Troy, N.Y., are planning to start a 4-day meeting Thursday in Savannah, Ga.

State insurance legislators who belong to NCOIL are working on amendments to a life settlement model act.

The American Council of Life Insurers, Washington, has been supporting a proposal that would require policyholders to hold policies for 5 years unless they had experienced major life changes.

Other groups supporting the 5-year rule include the Association for Advanced Life Underwriting, Falls Church, Va.; the National Association of Insurance and Financial Advisors, Falls Church.; and the National Association of Independent Life Brokerage Agencies, Fairfax, Va.

The exceptions to the 5-year rule would include provisions exempting insureds who are terminally or chronically ill and insureds who are divorced or widowed from the original policy owner.

The trade groups’ recommendations largely follow language in a current draft of amendments to the Viatical Settlements model act that will be considered during the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo., during a meeting set to start March 9.

The life and producer group suggestions also would allow insureds to sell after just 2 years in cases where policy premiums are funded “exclusively with unencumbered assets, including an interest in the life insurance policy being financed only to the extent of its net cash surrender value, provided by, or fully recourse liability incurred by, the insured or a person…” and if “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, including through an assumption or forgiveness of the loan.”

In a footnote, the draft states that the language “responds to financier concerns to protect non-recourse financing for insurance policy acquisitions. It permits non-recourse premium financing but requires an owner to own the policy for 5 years, whereas an owner who uses any personal cash or asset as collateral for a loan is permitted to settle a policy in 2 years.”

Groups favoring a rule that would allow any insured to sell after 2 years include the Life Insurance Finance Association, Marietta, Ga.; the Life Insurance Settlement Association, Orlando, Fla.; and the Life Settlement Institute, Hudson, Ohio.

LIFA Executive Director Scott Cipinko writes in a comment letter: “Attempts to prohibit the sale of a life insurance policy until a policy has reached the 5-year period [are] overbroad and [penalize] legitimate life insurance premium finance programs. There is an absolutely legitimate market for these programs. These programs are utilized by individuals in their estate planning situations who do not have the liquidity to pay large life insurance premiums, yet still have the need for such coverage.”

The “central issue” is not the use of premium finance but “the improper use of trusts to circumvent the law,” Cipinko writes.

“Those companies that still are involved in the SILI transactions no longer sell policies held in a trust and flip the ownership of those policies,” Cipinko writes.

“Instead, the policies are now owned by a life insurance trust and the beneficial ownership interest in the trust is sold,” Cipinko writes. “It is clear given these facts that these SILI policies will not be impacted by a prohibition on resale as is contained in the current draft of the NAIC Viatical Settlements Model Act. It is this loophole which we seek to close. The only way to stop the sale of these policies is to deal with the trust issues and insurable interest.”

LISA’s version of the draft model includes disclosures to owners that would affect both life settlement and life insurance companies. The LISA says a provider should have to tell an owner that there are alternatives to life settlement contracts, such as accelerated benefits that may be available in the life contract.

LISA also would require life insurers to send a written notice to policyholders age 60 and over or policyholders who are terminally or chronically ill noting that life settlement contracts are an alternative when an insurer receives a surrender request, an accelerated benefit request or a notice of a policy lapse.