There was extensive back and forth about the merits, or lack of them, of life settlements during Senate Committee on Aging hearings in Washington, D.C., on April 29, 2009.
Among comments heard:
o There’s a disturbing ambiguity in information from the industry about who earns what from settlement deals, and how much value individuals selling their policies actually get.
o The settlement industry is stifling state legislation that would provide effective regulation of the business.
o The industry must be regulated at the federal level.
o State regulation is providing perfectly adequate oversight of the settlement business, with many adopting model regulations by the National Association of Insurance Commissioners and the National Conference of Insurance Regulators.
o The opposition of life insurance companies to life settlements ignores the needs of older policy holders.
o Tax rules over life settlement proceeds need clarification.
Michael McRaith, Director of Insurance, Illinois Department of Financial and Professional Regulation, questioned whether the compensation of the individual owning a policy is minimized to enhance the compensation of others involved in a life settlement.
“There’s no transparency about who’s getting paid what for a policy whose premiums may be paid by a policyholder for decades,” McRaith said.
Senator Herbert Kohl (D-Wisc.), chair of the committee, asked McRaith if effective state regulation was a long way off.
“All I see is nothing but a patchwork of state laws,” McRaith replied. “Bad actors in the business will drive a truck right through it.”
Mary Beth Senkewicz, Deputy Commissioner for Life and Health Insurance, Florida Office of Insurance Regulation, charged that industry lobbyists had succeeded in “gutting” effective life settlement rules in her state, while lawsuits had stopped her department from investigating the practices of some firms in the business.
“If states haven’t been able to adopt the NAIC model in a few years, that would be a fair warning” that federal regulation is needed, she warned.
Fred Joseph, the Colorado Securities Commissioner and president of the North American Securities Administrators Association Inc., Washington, said he was not ready to acknowledge that states are unable to regulate settlements adequately. “The laws we have work,” he insisted.
Scott Peden, president, Life Partners Inc., Waco, Texas, said the industry “asked nothing more than that life insurers honor the contracts they entered into.” Insurers that oppose settlements are “not looking out for the best interest of seniors,” he charged.
Peden downplayed charges by some insurers that many settlements are really stranger-owned life insurance agreements (where policyholders know when they buy the policy that they will sell it to an unrelated party).
“Life Partners never engaged in STOLI,” he insisted. Besides, he said, STOLI “is an agent supervision issue, not a life settlement issue. It’s up to insurance companies to make sure their agents follow the rules.”
Peden also favored federal over state regulation of settlements. (Coincidentally or not, Peden’s firm last year settled a case brought by Fred Joseph’s department in Colorado over a life settlement.)
“Uniform regulations may be needed to protect those who are unsophisticated,” Peden said. “Congress is authorized to regulate interstate commerce, and most life settlements are interstate. Having state regulation raises costs. The jurisdiction of states [over settlements] must end at their borders.”
Asked by Sen. Kohl what provisions he would like to see in a federal law regulating settlements, Peden said legislation should recognize that the secondary market must be regulated differently from life insurance.
“We want to demystify transactions that have become unnecessarily complex due to a patchwork of legislation,” Peden replied. “This leads to uncertainly, a risk evaluation that we have to price into the product. And we may not be able to do business in a state, depriving seniors there of access to the market. Federal regulation levels the playing field.”
Peden also urged the committee to consider legislation that would clarify any tax liability for life settlement policy owners.
“We believe that the proceeds from a life settlement should be treated as a capital gain or loss, based on the difference between the total premiums paid for a policy and the proceeds from the sale,” Peden said.