California Gov. Arnold Schwarzenegger recently signed into a law a bill to regulate the state’s life settlement market that includes a ban on stranger-owned life insurance policies.

Arnold Schwarzenegger

The Republican governor’s approval came one year after he vetoed similar legislation because it didn’t provide enough disclosures to consumers.

The law, authored by Sen. Ron Calderon (D-Montebello), chair of the California Senate Banking, Finance and Insurance Committee, mandates that policy owners not enter into a life settlement for at least two years after a policy is issued.

In STOLI arrangements, investors often solicit policy owners who are paid a small fee in return for turning over the life policy obtained in their name to investors. States have been battling over STOLI for several years.

The law prohibits life insurance companies from restricting lawful policy ownership transfers and from restricting their life agents from telling clients that life settlements can be an alternative to surrendering or obtaining the cash value of a life insurance policy.

The law also provides 30 days after signing or 15 days after receiving proceeds for a life settlement seller to change his or her mind and cancel the agreement.

California law now defines a life settlement as the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.