At no other time in recent memory has it been more important for life insurance agents to understand life settlement licensing and regulations in their state. The market opportunity is on the rise as baby boomers begin to retire, but agents who fail to follow the latest rules face increased scrutiny.
Three of the largest states (California, Illinois and New York) have recently changed the way life settlement transactions can be performed. While some of the changes are simple, such as making sure informational brochures are handed to potential clients, some are more complicated and can dramatically alter how agents offer life settlements to clients.
California was one of the first states to create regulations and licensing requirements for providers and brokers. However, the state recently changed the way insurance agents can participate in life settlement transactions, and confusion is common.
Today, a life insurance agent in California who recommends a settlement must be working directly with a settlement provider, secure a broker license with the state or become duly authorized with “producer authority” by the State of California Department of Insurance in order to earn any type of fee or consideration for the referral. The long and short of it: the days of life insurance agents calling brokers to shop policies on their behalf are over.
For life insurance agents in California, here are the options:
- Become a broker. An insurance agent can file paperwork with the state, pay a fee and become a licensed life settlement broker. With this license in hand, the agent can then shop policies on his own or simply refer a client to a broker and receive a commission.
- Secure “producer authority.” Life insurance agents licensed in the state for more than a year have another option: securing so-called producer authority. This is somewhat less tedious than the brokerage license but also requires a fee and filing with the state. Agents with producer authority can also forward policies directly to licensed brokers and providers.
- Work directly with a provider company. Provider companies, the most heavily regulated entities in the life settlement industry, have other options, primarily because their employees are covered by the company’s license. In California, life insurance agents can work directly with providers as long as the relationship is structured in a manner consistent with controlling statutes and regulations. Some life settlement providers have created such arrangements to make it easier for agents to offer life settlements with less burdensome paperwork.
In New York, a number of new requirements took effect in 2010. The New York Insurance Law requires that life settlement providers and brokers provide consumers with an information booklet that explains what a life settlement is, advocates that consumers consider all of their options and offers tips and questions to ask. New York remains vigilant regarding so-called stranger-originated life insurance (STOLI). The state wants consumers to know that if they are asked to or plan to buy a new life insurance policy with the primary purpose of selling it for cash to a third party, then this may be a transaction that is prohibited.
Like many other states, New York requires that providers and any “life settlement intermediary” be licensed with the state and file an annual statement, among other requirements. Any life settlement provider or intermediary must file copies of business forms for approval by the state.
Agents, brokers and providers must understand that New York regulations may go beyond state borders in some instances. According to the New York Insurance Law, regulations apply to any life settlement contract made, proposed to be made, or solicited with a resident of the state or any owner physically in the state.
In Illinois, life settlement contracts and disclosure statements must be filed and approved by the state before they can be used. A person shall not operate as a settlement broker without first obtaining an insurance producer license from the director and completing the settlement broker training requirements. An insurance producer shall not operate as a settlement broker unless the producer has been duly licensed as a resident insurance producer with a life insurance line of authority in Illinois or the insurance producer’s home state for at least one year.