What regulations protect life settlements?
State insurance departments regulate the policy itself, and many
states are in the process of updating regulations involving marketing a life settlement transaction to a policyowner. Some
states have implemented rules relating to the financial strength
of the life settlement provider. Investor regulations are being
developed, and state securities departments, the Securities and
Exchange Commission, and FINRA, the financial industry regulatory authority, are involved in regulating these transactions. In
addition, federal and state privacy rules apply.
The insurance department regulations that do apply to life
settlements are generally additions to viatical settlement regulations. In many cases, disclosure is the most important aspect
of these regulations. Some states require that commissions,
which can be significant, be disclosed.
Our group found that regulations are not yet comprehensive
and vary significantly by state. A consumer should seek competent legal advice to make sure he or she is in compliance.
What kind of personal information
is being collected?
The life settlement provider collects a good
deal of information about the policyowner
and person who is insured. Some of this
information is similar to what is collected
on a life insurance policy application (for
example, name, address, Social Security
number, proof of identification, physicians’ contact information, and complete medical history). Some of what
is collected is specific to the life settlement transaction, such as
the policy number and a recent illustration.
Because the investor will be interested in the insured individual’s health during the life of the insurance contract, the
insured also must provide the name of someone to contact in
the future to determine life or death status. Along with that, the
insured must sign broad releases of future medical information.
This is needed to evaluate the policy as part of a portfolio management process or in the case of future sale to another investor.
What happens to the policy after the sale?
After the transaction is finalized, the original owner has no more
control over the policy. It may be sold again to another investor.
Some life service providers put limitations on which entities
may buy the policies in the future (for example, not allowing the
policy to be sold to an individual). This limitation isn’t universal.
The insured’s status (life or death) is monitored every three
months or so while he or she is relatively healthy. This may be
simply by a mail or phone call query to the insured individual,
his or her heir, or his or her legal representative. This contact
arrangement is set up as part of the life settlement. In addition,
there may be checks against the Social Security death index.
To evaluate the life settlement portfolio, the insured’s health
may be monitored as well. His or her attending physician(s) may be
contacted to provide updated medical records on a periodic basis.
What if the insured wants to
purchase more insurance later?
Premiums on any new policy very likely will be higher than the
policy being sold, because of both age and health status. If the insured individual’s health has deteriorated too much, the insured
may not be able to obtain coverage at any cost and will be considered uninsurable.
In addition, the death benefit that belongs to the life settlement investor will count toward coverage limits set by the
insurance company, which may affect the insured’s ability to
make future life insurance purchases.
What does the consumer not need to know?
The consumer guide doesn’t discuss STOLIs. We started from
the assumption that we would discuss legitimate transactions
and stay away from controversy. STOLI may be quite important
to insurance companies, but it is more than consumers need to
know. We did, however, point out that a stranger will benefit
from an insured individual’s death and that premium financing
arrangements may cost more than they look like on the surface.
Nor does our guide discuss compensation. We recommend
that the policyowner get more than one quote. If compensation
is driving a recommendation, it probably will be apparent from
the bids. Some states require compensation to be disclosed, but
this is not universal. Lacking a discussion of STOLI, we didn’t
mention that in those cases, commissions are paid twice—by the
life insurance company and by the life settlement provider.
While the consumer guide underscores the fact that the investor expects to make money from the transaction, it doesn’t
go into detail about how that money is being made. While the
guide mentions life expectancy, it similarly doesn’t explain
how this is calculated or used by either party. The guide is long
enough without describing arbitrage concepts.
What else did the group discuss
that isn’t part of the consumer guide?
We discussed why life insurance companies would be concerned
about life settlements. These issues are beyond the charge of
our work group and the scope of the guide. But they are worth
mentioning here.
Why are insurance companies
concerned about s ToLi transactions?
Somebody is taking the wrong mortality bet. The life settlement
provider wants policies on relatively unhealthy individuals,
while the life insurer prefers to insure healthy individuals.
When a policy is bought and sold at the same time (I include
those transactions that take place the day after the contestability
period expires), both the insurance company and the investor
think they have accepted the risk they favor. Two possibilities
may have occurred. First, the insured may be lying to the underwriters of either (or both) the life insurance company or the life
settlement provider. Or the underwriter of either the settlement
provider or the insurance company has missed some important
health information, and the case is mispriced.
