A new bill regulating life settlements and forbidding stranger-originated life insurance policies has been signed into law by California Governor Arnold Schwarzenegger. A life settlement occurs when a third party purchases an existing life insurance policy for more than its cash surrender value but less than its net death benefit.

The new law addresses several aspects of life settlements. It requires that brokers be state licensed and complete 15 hours of approved training in life settlements, prevents insurers from restricting lawful transfers of policy ownership, forbids life insurance companies from trying to restrict brokers from educating policyholders about life settlement options and gives sellers the right to cancel a life settlement agreement 30 days after signing or 15 days after receiving the proceeds, whichever comes first.

The bill was sponsored by Democratic state senator Ron Calderon of Montebello, who is chairman of the California Senate Banking, Finance and Insurance Committee, and is modeled on legislation developed by the National Conference of Insurance Legislators. The Life Insurance Settlements Association described the law as “a major victory for American seniors seeking to avoid lapse or surrender of their current life insurance policies.” The new law takes effect on July 1, 2010.