Having a 2-year or a 5-year ban on certain settlement transactions is just one of several differences that life insurers, life settlement companies and premium finance representatives are expressing in suggestions to state insurance legislators who are preparing to draft amendments to a Life Settlements Model Act.
The discussion will take place during the spring meeting of the National Conference of Insurance Legislators, Troy, N.Y., which takes place March 1 – 4 in Savannah, Ga.
The debate on whether there should be a 2-year or a 5-year ban on settling a contract fell largely along industry lines. A 5-year ban from issuance of the contract continues to draw support from the American Council of Life Insurers, Washington; the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors, both in Falls Church, Va.; and the National Association of Independent Life Brokerage Agencies, Fairfax, Va.
The recommendation includes certain exceptions, such as for owners or insureds who are terminally or chronically ill, and for the death or divorce from an owner’s spouse. The trade groups’ recommendations largely follow language in a current draft of amendments to the Viatical Settlements model act which will be considered during the spring meeting of the National Association of Insurance Commissioners, later this month.
The life insurer and producer groups’ suggestions also maintain the 2-year provision 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 “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.”
The Life Insurance Finance Association, Marietta, Ga.; the Life Insurance Settlement Association, Orlando, Fla.; and the Life Settlement Institute, Hudson, Ohio, favor a 2-year ban on the settlement of a contract.
A letter from LIFA’s executive director, Scott Cipinko, notes: “An attempt to prohibit the sale of a life insurance policy until a policy has reached the 5-year period is overbroad and penalizes 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 when they do not have the liquidity to pay large life insurance premiums, yet still have the need for such coverage.”
In his letter, Cipinko also says that the “central issue” is not the use of premium finance but “the improper use of trusts to circumvent the law.
“Those companies that still are involved in the stranger-initiated life insurance transactions no longer sell policies held in a trust and flip the ownership of those policies,” Cipinko continues.
He writes: “Instead, the policies are now owned by a life insurance trust and the beneficial ownership interest in the trust is sold. 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 affect both life settlement and life insurance companies. The LISA suggestions say that a provider would 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.
It also would require life insurers to send a written notice to policyholders age 60 and over or policyholders who are terminally or chronically ill that life settlement contracts are an alternative in situations that might include, for instance, an insurer receiving a surrender request or an accelerated benefit request, or sending a notice of a policy lapse to a policy owner.
In a letter from Doug Head, LISA executive director, and Brian Smith, LSI president, the “benefit of competition” that the secondary market has created is noted. The letter cites an insurer press release which states that a re-priced universal life contract will offer higher cash surrender values.