The New York State Insurance Department has proposed legislation to regulate life settlements, including life settlement providers and brokers, and the contracts forms used in transactions.

Eric Dinallo

“Life settlements can be ripe for abuse. In these times of economic uncertainty, there is strong pressure on people pressed for cash to sell valuable assets, such as life insurance policies,” said Insurance Superintendent Eric Dinallo in a statement.

Dinallo’s office held public hearings last year seeking information about the sales and processes involved in life settlements in preparation for introducing legislation this year.

The proposed legislation specifically prohibits life settlement providers and brokers from engaging in stranger-owned life insurance (STOLI), a practice in which a life insurance policy is purchased for the benefit of someone, who at the time of policy issuance, has no insurable interest in the life of the insured individual.

State legislatures across the country have been debating and acting on STOLI sales in recent years, arguing that participants may be abusing the rights of those people for whom policies are obtained and later sold.

The bill met with immediate support from Life Partners Holdings, a Waco, Texas-based firm that since its founding in 1991 has purchased more than 6,000 policies totaling over $1.8 billion in face value.

“Life Partners has long supported sound, meaningful regulation and oversight for the life settlement industry that requires brokers and providers to operate in an open and fair marketplace,” said Brian Pardo, chief executive officer and chairman of Life Partners, in a statement. “While we generally purchase large face value policies from accredited and financially sophisticated individuals who don’t require a high degree of government protection, there are many more non-accredited seniors in New York and throughout the country who could benefit from the secondary life insurance market.”

Pardo noted “these ordinary senior citizens rely on a regulatory framework to offer them the same opportunities as financially sophisticated seniors.”

He said that in difficult financial times, the legislation could both support the needs of senior citizens and create “an environment that promotes the secondary market for life insurance.”

The New York bill protects consumers by “establishing a transparent marketplace with specific licensing, registration and disclosure requirements,” Dinallo said.

“That means consumers will be given the critical information they need to make a decision in a life settlement transaction, including the value of offers and counter-offers, the fees paid to life settlement brokers and the contractual arrangements among the parties involved in a transaction,” Dinallo said.

The proposed legislation calls for licensing requirements for life settlement providers and life settlement brokers, as well as registration requirements for life settlement intermediaries. It also proposes establishing privacy protections and other safeguards for insured individuals and policyowners.

New York law regulates viatical settlements, transactions involving the sale of life insurance policies by insured individuals who have a catastrophic or life-threatening illness or condition. A life settlement involves the sale of a life insurance policy without regard to the insured person’s health.

Under the proposed legislation, the insurance department would have the authority to issue, revoke, suspend or non-renew life settlement provider and life settlement broker licenses. It would require the registration of life settlement intermediaries who maintain electronic or other systems that facilitate life settlement transactions. Additionally, it would give the department prior-approval authority for contract forms used in transactions.

Dinallo said the legislation would establish numerous safeguards for insured individuals and policyowners, including protection against unlawful release of all information concerning the identity of an insured individual or policy owner, without the consent of the insured.

The legislation would also require the disclosure of significant life settlement contract provisions; the disclosure of affiliations or contractual arrangements among parties involved in a transaction; a complete and accurate description of all offers and counter-offers relating to the sale of the life insurance policy; a reconciliation for the policy owner showing the difference between the gross offer for the purchase of the life insurance policy and the net amount to be paid to the owner, including a listing of all fees and compensation to the life settlement broker and others; and advising the policyowner that selling a life insurance policy could result in tax consequences and could limit the insured individual’s ability to buy life insurance in the future.

The Insurance Department drafted the proposed legislation following a series of four public hearings last year to gather consumer input. The Department also solicited the views of life settlement providers, life settlement brokers, life insurers, life insurance agents, investors and trade associations.