Transparency & Evolving Settlement Law: Understanding the Requirements

Many states in 2008 have implemented new life settlement legislation, and there are expected to be considerably more regulatory changes in 2009. The list on this page highlights which states have passed new law. Changes have been based on two different models created separately by the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL). Some states have adopted either the NAIC or NCOIL models, while others have adopted a combination of the regulations proposed in both.

One of the major areas addressed by the new laws is transparency — the full disclosure of bids and commissions — and Welcome Funds and most parties who are involved in the life settlement industry agree that transparency is vital for continued growth.

"The revised laws call for full transparency," said the General
Counsel of Welcome Funds, Jeff Deutsch, "which means they not only require disclosure of how much compensation is being earned through a transaction, but also ask for communication of all offers, counteroffers and rejections throughout the process."

Specifically, new legislation mandates, "[a] full, complete and accurate description of all the offers, counteroffers, acceptances and rejections" relating to the proposed life settlement contract.

Deutsch, further discussing the NAIC and NCOIL models, noted that one of the major distinctions between the two is the number of years that must pass prior to consumers selling their life insurance policies in the secondary market. The NAIC model prohibits such a sale for five years with exceptions. NCOIL advocates a two-year moratorium on life settlements to coincide with the contestability period required by insurance companies.

The two models represent two different ideological approaches to combat STOLI, Stranger-Originated Life Insurance (or more accurately, IOLI — Investor Originated Life Insurance), which is the initiation of a life insurance policy for the benefit of a person who, at the time of creation or origination of the policy, has no insurable interest in the insured.

Members of the life settlement industry should be unanimous in their disdain for STOLI, and Welcome Funds does not advocate STOLI transactions in any shape or form. The NCOIL model not only appropriately bans STOLI but defines the term and provides, according to Deutsch, a "targeted approach" to the problem. The NAIC model, on the other hand, does not define STOLI nor address the problem directly. Instead, it uses the five year ban as its indirect solution, which has caused the Life Insurance Settlement Association to not only believe that the NAIC model infringes on consumer property rights, but also question the model's true intent.

Lastly, Deutsch pointed out that "it is critically important to understand that STOLI is not a life settlement. Life settlements occur long after issuance of the policy."

Contact Welcome Funds for more information and guidance on navigating and understanding the regulations for your state.