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A Big Hole In The NAIC's New Viatical Model Amendments

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The recent discussions and subsequent action taken by the National Association of Insurance Commissioners’ Life Insurance and Annuities (A) Committee concerning amendments to the Viatical Settlements Model Act turned from the issue of insurable interest and the manufacture of Stranger Initiated Life Insurance (SILI) to a discussion of life insurance premium finance. The Life Insurance Finance Association, which I represent, believes that this debate missed the mark because a critical component of the discussions concerning life and viatical settlements is still absent and is being ignored.

The central issue is not the role premium finance plays in the acquisition of life insurance but rather the improper and abusive use of trusts to circumvent the law. The parties that still are involved in the SILI transactions no longer have to sell policies held in a trust. The process is fairly simple as the parties merely flip the ownership of the trust that owns the policies. As the policies are owned by a life insurance trust and the beneficial ownership interest in the trust is sold, the ownership of the policy is not actually transferred under the NAIC Model Act, and there is no way an insurer ever finds out that the movement has been accomplished because no forms are required to ask for policy information to facilitate a transfer. The same trusts send the premium payments to the insurance companies until the insureds die.

It is clear given these facts that these SILI policies will not be impacted by any prohibition on resale contained in the current draft of the NAIC Viatical Settlements Model Act, regardless of the time required to keep the policy before transfer. It is this loophole which we have sought to close. The only way to stop the sale of these policies is to deal with the trust issues and insurable interest.

LIFA acknowledges and shares the legitimate concerns regarding illegal life settlements disguised as premium finance transactions, policies issued without insurable interest such as stranger-initiated life insurance, and other abusive tactics. LIFA has worked very hard to bring forth the issues of insurable interest before the NAIC Life Insurance and Annuities (A) Committee, but we were frustrated in our attempts to do so. In response to these concerns, LIFA drafted a document entitled Statement of Best Practices for the Life Insurance Premium Finance Industry.

Whether a life insurance premium finance transaction is “recourse” or a “non-recourse” loan is in no way, in and of itself, determinative of the existence of an insurable interest by the applicant. A “recourse” loan transaction can be structured in such a way as to fail to have insurable interest just as easily as a “non-recourse” loan transaction. Other than the fact that the collateral is a life insurance policy, a properly structured “non-recourse” life insurance premium finance loan is, at its core, no different from any other secured loan.

A life insurance premium finance lender should not: (i) own the policy or (ii) control the policy’s disposition, except in connection with enforcement of its rights in connection with a loan default. A premium finance lender must be permitted to take a security interest in the collateral provided to secure the loan. If part of the collateral is the life insurance policy, then the lender may take a security interest in the policy. This is no different from any other asset-backed loan, such as your home mortgage or auto loan.

Of course, having a security interest in an asset that collateralizes a loan carries with it certain rights for the lender that center around preserving and protecting the asset and its value, but this is to be expected and is standard for secured loans.

LIFA promotes the transparency of their methods and products to the insurance industry, and it is opposed to the SILI programs designed to circumvent the NAIC Model Act and state laws while hiding the true nature of these transactions from insurance carriers that issue SILI policies without accurate information. Such programs may put the insurance producer’s license at risk, while at the same time including the insured in a scheme such that they may unknowingly be aiding and abetting a fraud on the insurer.

We believe consumers should have the ability to choose how they purchase their life insurance. Consumers choosing to finance the purchase of their policies should not be discriminated against based on how they choose to finance the acquisition of this asset. Discrimination based upon the need of a consumer to finance a life insurance policy in order to make the purchase is still discrimination. A life insurer’s denial of a life insurance policy application based solely on an applicant’s choice of how to finance the payment of insurance premiums is not an bona fide underwriting risk factor and thus is potentially discriminatory on its face and in violation of Insurance Unfair Trade Practices Act.


“The central issue is not the role premium finance plays in the acquisition of life insurance but rather the improper and abusive use of trusts to circumvent the law.”

–Scott J. Cipinko