A new law regulating New York’s life settlements market and outlawing stranger-originated life insurance (STOLI) is awaiting the signature of Gov. David A. Patterson.

Neil D. Breslin

The New York State Senate passed the measure, sponsored by Sen. Neil D. Breslin (D-Delmar), outlining new regulations for the market, including protecting the medical and financial information of consumers. An accompanying New York Assembly bill (A 7131), sponsored by Assemblyman Joseph Morelle (D-Rochester), was passed in June.

If the governor signs it, the new legislation would require the licensure of life settlement companies and brokers by the New York State Insurance Department. It also would mandate that the policyholder and the individual insured under the policy consent to the release of medical and other personal information; life settlement companies and investors would need to keep any personal information related to the transaction confidential.

Similar to steps taken in other states nationwide, the New York law also would outlaw STOLI transactions, where large life insurance policies are purchased, usually for senior citizens, for the purpose of selling the policy within a short period of time.

Breslin said that a side effect from the growing life settlement market has been individuals insured under policies who do not have a life-threatening illness. When those individuals no longer want or need their policy and are able to obtain a monetary benefit greater than the cash surrender value, but less than the death benefit of the policy by selling it to a “life settlement provider.” The provider can then resell the policy to a third-party investor, a transaction that fell outside of state law until the new regulation would prohibit it.

“This legislation contains numerous disclosure and consumer protection provisions which will help to ensure that an owner considering selling his or her policy makes an informed decision,” Breslin said in a statement. “The legislation will also protect the medical and other personal information of those who enter into a life settlement transaction. In addition, this legislation specifically outlaws certain improper and abusive practices currently happening in the life settlement industry.”

Breslin added he is encouraging Paterson to “immediately sign what will be one of the most comprehensive and effective laws in the country for the regulation of the life settlement industry.”

In response to the possible new law, the Life Insurance Settlement Association (LISA) had a mixed message of support and concern for New York legislators.

The Orlando, Fla.-based trade association said the STOLI provisions of the law clearly reaffirm that such transactions occur at inception and does not include life settlements and that the new regulation also subjects life insurance companies to penalties for engaging in STOLI transactions.

With New York joining 38 other states regulating life settlements, LISA said even in the absence of regulation, state consumers have benefited from the market by receiving, on average, 300%-500% more than the cash surrender value in their policies.

“Furthermore, New Yorkers have been well protected by the best practices that have been advanced by LISA and its members,” the association said in a statement.

LISA pointed out that during hearings in New York last year, the state’s insurance department did not receive one complaint from those who have sold their policies and that the National Association of Insurance Commissioners has not recorded a complaint to date this year.

“LISA applauds the bill sponsors and the New York State Insurance Department for working with LISA and its members in crafting this legislation,” the association said. “While this bill is a good start to regulating life settlements in New York, there are several provisions which concern LISA and its members, and LISA will continue to work for reforms which will serve the consumers of New York. Of greatest importance is that New York consumers be educated and notified about all of their rights under their life insurance policy, in a timely manner, including the option of a life settlement, whenever they are facing a lapse or surrender of that policy.”