The New York legislature has passed S. 66009, a life settlement regulation bill.

The bill, which is awaiting action by New York Gov. David Paterson, D, was introduced by Sen. Neil Breslin, D-Delmar, N.Y., and Assemblyman Joseph Morelle, D-Rochester, N.Y., at the request of the New York State Insurance Department.

The bill is a “governor’s program bill,” meaning that it is part of package of bills introduced on behalf of the Paterson administration, a spokesman for the governor says.

The bill is based on the Life Settlement Model Act developed by the National Conference of Insurance Legislators, Troy, N.Y.

The New York Life Settlement Act would establish rules governing matters such as disclosure requirements, privacy protection requirements and rescission rights. The bill also would require licensing of settlement companies and provide for their oversight by the New York insurance department.

The bill would make the practice of stranger-originated life insurance illegal. In a STOLI transaction, speculators who have no relationship to a person initiate a insurance policy against that person’s life and pay the premiums, as an investment.

The New York bill provides several tools for insurers and life settlement companies to detect and prevent STOLI policies, and it would impose penalties for those engaging in STOLI transactions.

A supporter of the bill, state Sen. William Stachowski, D-Erie County, N.Y., says protecting consumers involved in life settlements is especially important given the current weak state of the economy.

“Life settlements have the serious potential for abuse,” Stachowski says in a statement. “With the stress of a struggling economy and financial pressures, many cash-strapped New Yorkers are searching for ways to liquidate valuable assets, including their life insurance policies.”

The Life Insurance Settlement Association, Orlando, Fla., has called the bill “a good start” and notes that the bill would preserve policyowners’ right to sell their policies.

Thirty-eight other states already regulate life settlements.

“With this new law in New York, nearly 90% of the United States population lives in states with life settlement regulation, most of which are based on the NCOIL model,” LISA says.

But LISA says it still wants New York to require insurers to notify policy owners that a settlement may be an alternative to surrendering a policy or letting it lapse.

The American Council of Life Insurers, Washington, has welcomed passage of the bill.

“This legislation places New York among a growing number of states battling against STOLI and those who would abuse senior citizens,” ACLI President Frank Keating says in a statement.