State cracking down on ‘life settlement’ industry

The state is moving to crack down on the controversial “life settlement” industry by adopting consumer protections for people – mostly senior citizens – who agree to take out a life insurance policy and then sell the rights to investors.
A new state law – which takes effect next July – will require life-settlement companies to register with state insurance regulators and disclose to potential customers the implications of making the company the beneficiary of a life insurance policy.
Thirty-two states have enacted similar laws in recent years amid growth in the life-settlement industry as older people with devastated nest eggs and a diminished ability to pay high-end life insurance premiums look for other sources of cash.
Rhode Island’s version of the law, based on model legislation recommended by the Troy, N.Y.-based National Conference of Insurance Legislators (NCIL), also bars an offshoot of the life-settlements industry called “stranger-originated life insurance” – or STOLI – in which companies approach older people to take out a life insurance policy, only to sell it immediately.
Rep. Brian P. Kennedy, D-Hopkinton, the sponsor of the House legislation to regulate the industry, called STOLI transactions “a warped notion” that is the equivalent of wagering on someone’s death.
“The sooner you die, the better it is for the company,” said Kennedy, a past president of the NCIL. “It’s not the family that’s going to benefit one dime.”
To prevent STOLI transactions, the new law allows policyholders to sell their policies only after they’ve held on to them for more than two years.
Rhode Island’s legislation doesn’t prohibit life settlements – which usually involve people at least 65 who are not terminally or chronically ill — outright because there are cases where they are beneficial for the insured, Kennedy said. In situations where the policyholder has no surviving family members, for instance, they can cash out their life insurance policy to improve their quality of life. “There are cases where people really need to sell their policies now,” Kennedy said.
The industry trade group Life Insurance Settlement Association has expressed support of the NCIL model legislation, although it has bristled when insurance regulators in other states have lumped life settlements with STOLI transactions.
The association argues life settlements are lawful secondary-market sales, while STOLI is a fraudulent practice.
The life-settlements industry got its controversial start with the outbreak of AIDS in the 1980s. Patients with few resources needed to sell their life insurance policies to pay for medical treatments, which mostly didn’t prevent the patient’s death. Brokers were soon offering to buy policies of the dying. The industry has dealt with a negative public perception ever since.
In Rhode Island, it’s the second time around for the life-settlements legislation.
Last year, legislators approved a similar measure, but Gov. Donald L. Carcieri vetoed it. In his veto message, Carcieri said he was concerned that the regulations might restrict consumers’ abilities to purchase other life insurance products.
Although lawmakers submitted the proposal again in the spring, it didn’t receive final passage until the special two-day session late last month.
The governor didn’t veto it, but he let it become law without his signature earlier this month.
Kennedy said people who sell their policy to a life-settlements company often aren’t told crucial information, such as the possible tax consequences or that the transaction may hinder the ability to obtain insurance in the future.
The new law requires the company to disclose that information, plus the broker’s compensation. And they must tell policy sellers about alternatives to a life-settlement contract.
Because the life-settlement industry has been unregulated in Rhode Island until now, Kennedy said it’s difficult to determine whether there have been widespread complaints about life settlements and STOLI transactions. &#8226