California Gov. Arnold Schwarzenegger has signed a bill aimed regulating life settlements and imposing a state ban on stranger-originated life insurance policies.
California defines a life settlement as the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.
In a STOLI arrangement, investors with no relationship to the insured initiate the purchase of the policy and pay the premiums.
The new law, S.B. 98, prohibits policy owners from entering into a life settlement for 2 years after a policy is issued.
S.B. 98 was sponsored by state Sen. Ron Calderon, D-Montebello, Calif., chair of the California Senate Banking, Finance And Insurance Committee.
The newly enacted law includes the following provisions:
- Requires individuals brokering or soliciting life settlement transaction in the state to be licensed by the state insurance commissioner after completing 15 hours of state-approved training in settlements.
- Forbids insurers from restricting lawful transfers of policy ownership.
- Requires agents and brokers arranging settlements to disclose to insureds all offers made on their policy and to divulge any business relationship, including compensation, with any person making an offer on a policy.
- Prohibits life insurance companies from acting to restrict agents from informing clients that life settlements are an alternative to surrendering or cashing in their policy.
- Allows individuals to cancel a settlement 30 days after signing the agreement or 15 days after receiving the proceeds, whichever is sooner.
A similar bill was advanced in the state legislature in 2008. Schwarzenegger, R, vetoed that bill, saying it did not include require the right disclosures.
The law is based on model life settlement legislation developed by the National Conference of Insurance Legislators, Troy, N.Y., according to the Life Insurance Settlements Association, Orlando, Fla.
In a statement, LISA is calling the new California law “a major victory for American seniors seeking to avoid lapse or surrender of their current life insurance policies.”
“Senate Bill 98 provides a strong regulatory framework for the ever-growing life insurance settlement industry in California,” LISA says.
Coventry First L.L.C., Fort Washington, Pa., says S.B. 98 is “one of the strongest laws in the nation to regulate life settlements, ensuring that California’s life insurance policy owners are able to obtain the best value for life insurance policies that are likely to be lapsed or surrendered.”
“Legislation to curb STOLI transactions and establish new consumer protections has now been enacted in 26 states and is pending in 13 others,” John Mangan, a vice president at the American Council of Life Insurers, Washington, says in a statement. “We are grateful to the governor and the California Legislature for their efforts to protect seniors from these fraudulent investment schemes.”
Among organizations opposed to the legislation were the California Life Settlement Association, Santa Monica, Calif.; John Hancock Life Insurance Company, Boston, a unit of Manulife Financial Corp., Toronto; Prudential Financial Inc., Newark, N.J.; Roycroft Funding L.L.C., Long Beach, Calif.; and ING U.S. Insurance, Minneapolis, a unit of ING Groep N.V., Amsterdam, according to the state Senate Rules Committee.