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The regulatory environment of the secondary market
By Larry Simon
Over the course of the past year, financial professionals and industry organizations have begun placing greater attention on creating uniform standards for the life-settlement market, causing the regulatory environment of the secondary market for life insurance to evolve significantly.
Life settlements are financial transactions that can help eligible senior-aged clients better deal with unnecessary life insurance policies. The transactions can also benefit financial professionals looking for new ways to expand clientele and fulfill fiduciary duties to clients. Life settlements have been around since the early 1990s, but some financial professionals have yet to enter the marketplace because of lack of licensing or concerns over how safe the growing industry is for themselves and their clients.
It is important to note that while the life-settlement industry has been regulated for some time, the transactions are not nationally regulated. Instead, all laws are created and enforced on a state-by-state basis. The increase in the number of financial professionals entering the marketplace in past years has placed more of a focus on better regulating the industry, and created interest in regulations that are more similar across the board. In fact, so far this year, states have introduced more than 60 bills looking to amend or enact regulations that affect the life-settlement industry. Financial professionals interested in working with life settlements need to understand the regulatory matters currently affecting the industry, as such issues have the potential to greatly affect the secondary market and industry business practices.
A changing regulatory landscape
One of the main reasons the life-settlement industry has seen increased regulatory focus is due to issues surrounding stranger-originated life insurance (STOLI). STOLI -- the initiation of a life insurance policy that sets out to benefit a person or entity that has no insurance interest in the insured at the time of policy issuance -- violates insurable interest laws and has caused confusion for those working with life settlements. While life settlements are an established and regulated segment of the life insurance industry, STOLI transactions have been widely criticized by the life-settlement and insurance industries, and have been the focus of two model acts recently introduced and amended to help cut down on fraudulent financial practices.
The first act was brought to the attention of financial professionals in June 2007, by the National Association of Insurance Commissioners (NAIC) in the form of new amendments to the Viatical Settlements Model Act. These amendments set out to curb STOLI practices by establishing new guidelines affecting premium-financed policies. The main goal of the amendments was to help prevent STOLI, but certain amendments, such as enacting a five-year ban on settling life insurance policies in the secondary market, caused industry alarm. The five-year ban also caused industry associations such as the National Conference of Insurance Legislators (NCOIL), the Life Insurance Finance Association (LIFA) and the Life insurance Settlement Association (LISA®) to release statements detailing concerns with the NAIC Model Act amendments. Because of the amount of opposition to the NAIC act, a second model act was introduced and adopted by NCOIL. This version included updated amendments that many financial professionals believed better represented the needs of the industry, while establishing a new STOLI definition that helped distinguish the differences between STOLI and a life-settlement transaction.
The NAIC Model Act versus the NCOIL Model Act
Since the introduction of the NAIC and NCOIL Model Acts, there has been an increased push for states to enact laws based on the NCOIL act. States that use the NCOIL model include Connecticut, Hawaii, Kansas, Kentucky, Oklahoma and the recently passed bill in California. States that chose to use the NAIC as their model include Iowa, Nebraska, Ohio and West Virginia. Meanwhile, a number of bills include a mix of provisions from both of the acts.
Despite the fact that more states have looked to the NCOIL amendments, most industry professionals support the NCOIL provisions because they are believed to effectively stop STOLI, while also protecting the best interest of the insured. Some of the main guidelines outlined in the NCOIL act include:
The NCOIL and NAIC Model Acts are not the only aspects of the life insurance industry gaining increased interest. There has also been a rise in licensing attention in the marketplace, mainly due to the fact that some individuals working with life settlements may be looking to avoid producer-licensing requirements by partnering with a non-licensed provider. This practice is know as "renting out" and involves the negotiation and processing of cases by a non-licensed provider who issues contracts in the name of a licensed provider.
Financial professionals who are working with life settlements should become familiar with licensing requirements and should always remember to conduct due diligence. Doing so can cut down on complications associated with working with improperly licensed firms and help avoid unnecessary regulatory risks. Financial professionals looking to conduct due diligence should also gather information on multiple providers, as well as determine the licensing status and potential business partners in the state where each insured resides.
Where to learn more about life-settlements regulations
The life-settlement industry will continue to grow in the coming months and years, and as more states begin to enact laws regulating life settlements, financial professionals will see the secondary market become even more established and protected from fraudulent practices. Financial professionals should continue to become knowledgeable in the changing regulations in order to better protect themselves and their clients from STOLI, while ensuring that the best interest of the consumer remains intact.
Those wishing to learn more can turn to industry organizations such as NCOIL for up-to-date information on newly enacted legislation, as well as LISA's Web site (www.thevoiceoftheindustry.com), which dedicates a section to the issues concerning STOLI's impact on the marketplace. The LISA Web site also offers provider licensing information on a state-to-state basis and information on provider compliance departments.
Knowing how the industry is regulated and keeping up to date with the STOLI issue can help those interested in life settlements become better prepared for working within the secondary market.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
Life settlements are financial transactions that can help eligible senior-aged clients better deal with unnecessary life insurance policies. The transactions can also benefit financial professionals looking for new ways to expand clientele and fulfill fiduciary duties to clients. Life settlements have been around since the early 1990s, but some financial professionals have yet to enter the marketplace because of lack of licensing or concerns over how safe the growing industry is for themselves and their clients.
It is important to note that while the life-settlement industry has been regulated for some time, the transactions are not nationally regulated. Instead, all laws are created and enforced on a state-by-state basis. The increase in the number of financial professionals entering the marketplace in past years has placed more of a focus on better regulating the industry, and created interest in regulations that are more similar across the board. In fact, so far this year, states have introduced more than 60 bills looking to amend or enact regulations that affect the life-settlement industry. Financial professionals interested in working with life settlements need to understand the regulatory matters currently affecting the industry, as such issues have the potential to greatly affect the secondary market and industry business practices.
A changing regulatory landscape
One of the main reasons the life-settlement industry has seen increased regulatory focus is due to issues surrounding stranger-originated life insurance (STOLI). STOLI -- the initiation of a life insurance policy that sets out to benefit a person or entity that has no insurance interest in the insured at the time of policy issuance -- violates insurable interest laws and has caused confusion for those working with life settlements. While life settlements are an established and regulated segment of the life insurance industry, STOLI transactions have been widely criticized by the life-settlement and insurance industries, and have been the focus of two model acts recently introduced and amended to help cut down on fraudulent financial practices.
The first act was brought to the attention of financial professionals in June 2007, by the National Association of Insurance Commissioners (NAIC) in the form of new amendments to the Viatical Settlements Model Act. These amendments set out to curb STOLI practices by establishing new guidelines affecting premium-financed policies. The main goal of the amendments was to help prevent STOLI, but certain amendments, such as enacting a five-year ban on settling life insurance policies in the secondary market, caused industry alarm. The five-year ban also caused industry associations such as the National Conference of Insurance Legislators (NCOIL), the Life Insurance Finance Association (LIFA) and the Life insurance Settlement Association (LISA®) to release statements detailing concerns with the NAIC Model Act amendments. Because of the amount of opposition to the NAIC act, a second model act was introduced and adopted by NCOIL. This version included updated amendments that many financial professionals believed better represented the needs of the industry, while establishing a new STOLI definition that helped distinguish the differences between STOLI and a life-settlement transaction.
The NAIC Model Act versus the NCOIL Model Act
Since the introduction of the NAIC and NCOIL Model Acts, there has been an increased push for states to enact laws based on the NCOIL act. States that use the NCOIL model include Connecticut, Hawaii, Kansas, Kentucky, Oklahoma and the recently passed bill in California. States that chose to use the NAIC as their model include Iowa, Nebraska, Ohio and West Virginia. Meanwhile, a number of bills include a mix of provisions from both of the acts.
Despite the fact that more states have looked to the NCOIL amendments, most industry professionals support the NCOIL provisions because they are believed to effectively stop STOLI, while also protecting the best interest of the insured. Some of the main guidelines outlined in the NCOIL act include:
- A clear definition of the difference between STOLI and life settlements
- The establishment of a required exchange of critical information between life insurers and senior clients
- The use of more recognizable terms, including "broker" and "life settlement contact"
- Prohibition against engaging in STOLI transactions, deeming them "fraudulent life-settlement acts"
- Surety bond for licensing in the amount of $250,000, with no capacity to continue to transact business with a pending license application
- Prohibition on entering into life-settlement contracts prior to the issuance of a policy within a five-year time period
- Lengthy rescission periods
The NCOIL and NAIC Model Acts are not the only aspects of the life insurance industry gaining increased interest. There has also been a rise in licensing attention in the marketplace, mainly due to the fact that some individuals working with life settlements may be looking to avoid producer-licensing requirements by partnering with a non-licensed provider. This practice is know as "renting out" and involves the negotiation and processing of cases by a non-licensed provider who issues contracts in the name of a licensed provider.
Financial professionals who are working with life settlements should become familiar with licensing requirements and should always remember to conduct due diligence. Doing so can cut down on complications associated with working with improperly licensed firms and help avoid unnecessary regulatory risks. Financial professionals looking to conduct due diligence should also gather information on multiple providers, as well as determine the licensing status and potential business partners in the state where each insured resides.
Where to learn more about life-settlements regulations
The life-settlement industry will continue to grow in the coming months and years, and as more states begin to enact laws regulating life settlements, financial professionals will see the secondary market become even more established and protected from fraudulent practices. Financial professionals should continue to become knowledgeable in the changing regulations in order to better protect themselves and their clients from STOLI, while ensuring that the best interest of the consumer remains intact.
Those wishing to learn more can turn to industry organizations such as NCOIL for up-to-date information on newly enacted legislation, as well as LISA's Web site (www.thevoiceoftheindustry.com), which dedicates a section to the issues concerning STOLI's impact on the marketplace. The LISA Web site also offers provider licensing information on a state-to-state basis and information on provider compliance departments.
Knowing how the industry is regulated and keeping up to date with the STOLI issue can help those interested in life settlements become better prepared for working within the secondary market.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
