This section teaches you about life settlements, which are financial transactions that allow the policyowner to sell a life insurance policy to a third party. Stay alert for important definitions that pertain to life settlement transactions, as well as licensing and registration requirements for brokers.
TERMS TO KNOW
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Accredited investor — an investor whose net worth is in excess of $1 Million, or a corporation with assets in excess of $5 Million
Capital — money or other financial assets to operate a businessDisclosure — information revealed so someone can make an intelligent and educated decision Finder's fee — a commission paid to someone who connects a buyer and a seller (an intermediary's fee) HIPAA — Health Insurance Portability and Accountability Act: protects individual's health information and sets standards for privacy and security of that informationMaterial information — information that may alter either party's decisions regarding a contract Nonconforming contract — a contract that does not follow state guidelines and provisions Rescission — an action that takes back, cancels, or nullifies | |
The term life settlement refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash. A life settlement would require an absolute assignment of all rights to the policy from the original policyowner to the new policyowner.
Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have grown too high to justify continuation of the policy. In many cases, however, life settlement transactions are offered to senior citizens who may have a life threatening illness and a short life expectancy. In these situations, the owner may elect to sell the policy to a life settlement provider for an amount greater than what they would receive if they surrendered the policy for cash value.
Example:
A person, age 70, owns a $1,000,000 life insurance policy. He recently sold his business for $5,000,000 and decided he no longer needed the insurance coverage. The cash value is $390,000, which the insurance company would give the policyowner if he cashed in the policy. A life settlement provider may offer him, after reviewing his medical records, $575,000 for the policy. Once ownership is transferred and the policyowner has received the funds, the life settlement company will assume premium payments until the insured dies, at which time the life settlement company will receive the proceeds of the policy - $1,000,000.
A. Definitions
The term Business of Life Settlement refers to any activity relating to the solicitation and sale of an insurance policy to a third party who has no insurable interest in the insured (i.e. soliciting, negotiating, effectuating, monitoring or tracking life settlement contracts).
The term owner refers to the owner of the policy who may seek to enter into a life settlement contract.
Life Expectancy is an important concept in life settlement contracts. It refers to a calculation based on the average number of months the insured is projected to live due to medical history and mortality factors.
Life Settlement Contract establishes the terms under which the life settlement provider will pay compensation to the policyowner, in return for the assignment, transfer, sale, or release of any portion of any of the following:
- The death benefit;
- Policy ownership;
- Any beneficial interest; or
- Interest in a trust or any other entity that owns the policy.
Life settlement providers may not use any life settlement contract unless the form of the contract, the application, and any other form that is required by regulations, have been filed with and approved by the Superintendent of Financial Services. The Superintendent may later withdraw the approval if it is discovered that the contract contains provisions that are unjust, unfair, or inequitable.
The following would not constitute a Life Settlement:
- Assignment of a life policy as collateral for a loan (that will not be used for premium payments);
- A policy loan;
- Surrender of an insurance policy;
- A 1035 exchange;
- Assignment of a life policy to an individual;
- An agreement to assign a contract that is already a policy that has been acquired by a life settlement provider (a settled policy);
- An agreement between parties closely related to the insured by blood or law;
- Employer-owned life insurance on key employees;
- Other forms of legitimate business insurance;
- Any other form of agreement determined similar to any of the above by the Superintendent.
Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and in their best interest.
This does not include a licensed life settlement provider or its representative, an attorney, an accountant, or a financial planner. This category includes persons who would not receive a commission upon completion of a life settlement contract, but charge a fee for their services, whether or not ownership of the policy is transferred.
Financing Transaction takes place when a licensed settlement provider obtains funds from the financing entity. Financing Entity includes any accredited investor who provides funds for the purchase of one or more life settlement contracts and who has an agreement in writing to do so.
B. Broker License Requirements
Before a person can act as a life settlement broker in this state, he or she must be properly licensed. The following are the required qualifications for a licensee:
- Be at least 18 years old;
- Submit an application to the Superintendent on the approved form;
- Be determined competent and trustworthy by the Superintendent;
- Complete required prelicensing education;
- Pass the licensing exam;
- Pay any required fees; and
- Submit fingerprints.
If a firm or association is applying for a broker's license, they must name and authorize natural persons to act individually as life settlement brokers for the firm.
If a life producer has maintained an active license for one year, the prelicensing class and exam, as well as fingerprinting, may be waived when applying for a life settlement broker license. The Superintendent may refuse to issue a life settlement broker's license if the applicant is deemed not trustworthy or has failed to comply with any licensing requirements.
If a life settlement broker's license is active, but has been lost or destroyed, the Superintendent may issue a replacement license. Prior to that, however, the broker must file a written application for such license, affirming under penalty of perjury that the original license has been lost or destroyed. A $15 fee will also be required.
C. Advertising
A licensed life settlement provider, intermediary, or broker may advertise, but must comply with all advertising and marketing laws, rules, and regulations set forth by the Superintendent. Advertisements must be truthful, accurate and not be misleading in any way.
D. Privacy
Life settlement brokers, intermediaries, or providers may not share information regarding the insured's identify, or financial or medical information, except as necessary to conduct the business of the transaction, unless permitted or required by law. All parties to the transaction must comply with privacy protections required by federal law. Should the laws of the state provide for greater confidentiality than public health law requires, the regulations of the state will govern.
E. Prohibited Practices
The following are considered prohibited practices in the business of life settlements:
- Entering into a life settlement contract if the person is aware of any deception;
- Engaging in any transaction while knowing the intent was to avoid disclosure of material information relating to life settlements;
- Engaging in any fraudulent acts in connection with any life settlement;
- Entering into a premium finance loan arrangement where any consideration is paid other than normal commissions, or fees charged other than normal loan fees;
- Acting as a life settlement broker or intermediary while having an interest in that policy;
- Receiving any compensation for acting as a life settlement broker or intermediary without being properly licensed;
- Transferring the ownership of a policy that is subject to a premium finance arrangement and not remitting any proceeds or consideration paid (other than normal commissions or loan fees) to the original owner;
- Paying finder's fees or any other compensation to any owner's physician, attorney, accountant, insurance producer or consultant, or other person acting in these capacities;
- Paying life settlement broker's fees before they have been fully disclosed; and
- Paying life settlement payments in installments.
1. Commission Sharing
Persons are prohibited from receiving any compensation for acting as a life settlement broker, or sharing any compensation with a person who is not licensed as such in this state. No finder's fees or referral fees may be paid, directly or indirectly, to any owner's physician, attorney, accountant, insurance producer, or insurance consultant.
F. Stranger-Originated Life Insurance
Stranger-originated life insurance (STOLI) is a life insurance arrangement in which a person with no relationship to the insured (a "stranger") purchases a life policy on the insured's life with the intent of selling the policy to an investor and profiting financially when the insured dies. In other words, STOLIs are financed and purchased solely with the intent of selling them for life settlements.
STOLIs violate the principle of insurable interest, which is in place to ensure that a person purchasing a life insurance policy is actually interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against policies they suspect are involved in STOLI transactions.
Note that lawful life settlement contracts do not constitute STOLIs. Life settlement transactions result from existing life insurance policies; STOLIs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in the life of the insured at the time of policy origination.
The state of New York does not allow direct or indirect participation in STOLIs.
Trust-owned policies: It is also illegal to use a trust, directly or indirectly, to provide funds for a STOLI transaction in a manner that violates insurable interest laws of this state.
G. Chapter Recap
In this chapter you learned about life settlements. Let’s recap the key terms and definitions, as well as producer licensing and conduct regulations:
| GENERAL CONCEPTS | |
| Life Settlement |
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| Parties to a Life Settlement |
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| LICENSING REQUIREMENTS | |
| Life Settlement Broker |
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| Fingerprinting |
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| PROHIBITED PRACTICES | |
| Stranger-Originated Life Insurance (STOLI) |
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| Prohibited Practices |
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Chapter Complete