BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair SB 98 (Calderon) Hearing Date: April 15, 2009 As Amended April 1, 2009 Fiscal: Yes Urgency: No SUMMARY SB 98 requires any person transacting life settlements to be licensed by the Department of Insurance and makes several other conforming changes. DIGEST This bill requires the licensing of persons who transact life settlement contracts, makes it unlawful to issue or market the purchase of a new life insurance policy for the purpose of settling the policy, generally prohibits individuals from entering into a life settlement during the initial two years of a policy, authorizes the Insurance Commissioner to disapprove life settlement forms, requires specified disclosures to consumers including a notice of possible alternatives to life settlements, regulates marketing practices, and prohibits predatory practices such as false and misleading statements. Existing Law 1. Defines a "viatical settlement contract" as an agreement entered into between a person owning a life insurance policy upon the life of a person with a catastrophic or life-threatening illness or condition and another person by which the policy owner receives compensation less than the death benefits of the insurance policy in return for an assignment, sale, or transfer of the death benefits or ownership of the insurance policy, but does not include an assignment of a life insurance policy to a licensed lending institution or credit union as collateral for a loan. 2. Defines a "life settlement contract" as an agreement, other than a viatical settlement contract, for the SB 98, Page 2 purchase, sale, assignment, or transfer of the death benefit of a life insurance policy for consideration that is less than the expected death benefit of the life insurance policy. 3. Exempts life agents, licensed by the Insurance Commissioner (Insurance Commissioner) to transact the sale of viatical or life settlement contracts, from the requirement to become certificated broker-dealers licensed by the Commissioner of Corporations. 4. Defines "an insurable interest," with reference to life and disability insurance, as an interest based upon a reasonable expectation of pecuniary advantage through the continued life, health or bodily safety of another person and consequent loss by reason of that person's death or disability or a substantial interest engendered by love and affection in the case of individuals closely related by blood or law. 5. Specifies that an individual has an unlimited insurable interest in his or her own life, health, and bodily safety and may lawfully take out a policy of insurance on his or her own life, health, or bodily safety and have the policy made payable to whomsoever he or she pleases, regardless of whether the beneficiary designated has an insurable interest. 6. Prohibits anyone from entering into or soliciting viatical settlements unless the person has been licensed by the Insurance Commissioner. An application for a license must be accompanied by a fee of $2,833 and the applicant must provide any information required by the Insurance Commissioner. The annual renewal fee for these licenses is $177. 7. Prohibits a viatical settlements licensee from using any viatical settlement form unless it has been approved by the Insurance Commissioner. Any form filed with the Insurance Commissioner by a licensee is deemed approved if it is not disapproved within 60 days. The Insurance Commissioner must disapprove a viatical settlement form if the Insurance Commissioner finds the form is contrary to the interests of the public or otherwise misleading or unfair to the consumer. 8. Requires viatical settlements licensees to disclose to applicants, at the time of solicitation for the viatical settlement, of possible alternatives to viatical settlements for persons with catastrophic or life-threatening illness, including accelerated benefits options that may be SB 98, Page 3 offered by the life insurer; tax consequences that may result from entering into a viatical settlement; and consequences for interruption of public assistance as provided by information provided by state agencies. 9. Authorizes the Insurance Commissioner to adopt regulations reasonably necessary to govern viatical settlements and transactions and requires the Insurance Commissioner to adopt regulations to address conflicts of interest that may arise. 10. Authorizes the Insurance Commissioner to examine the business and affairs of any licensee or applicant for a license. The Insurance Commissioner may issue orders to licensees to ensure or obtain compliance with law, and may order payment of a monetary payment not to exceed $10,000. 11. Prohibits any person licensed to sell or solicit viatical settlements from engaging in any false or misleading advertising, solicitation, or practice. A person who violates this provision is subject to a fine of up to three times the amount of the loss, by suspension of their license, and up to one year imprisonment in the county jail. 12. Specifies that any person who enters into a viatical settlement with a viatical settlements licensee has the right to rescind the settlement within 15 days of execution of the settlement. This bill 1. Defines "life settlement contract" as a written agreement between a "provider" and an owner of a life insurance policy, establishing the terms of compensation. This compensation is less than the expected death benefit of the insurance policy, and is provided in return for the owner's sale or bequest of the death benefit of the insurance policy, provided that the minimum value for a life settlement contract shall be greater than a cash surrender value or accelerated death benefit available at the time of an application for a life settlement contract. A "provider" is defined as a person who enters into or effectuates a life settlement contract with an owner of a life insurance policy, with certain exceptions. (Generally, the provider is the person who is buying the policy.) SB 98, Page 4 2. Specifies that trusts and special purpose entities that are used to initiate the issuance of policies of insurance for investors, where one or more beneficiaries of those trusts or entities do not have an insurable interest in the life of the insured party, violate the insurable interest laws and the prohibition against wagering on life. 3. Specifies that a "life settlement contract" also includes a premium finance loan, under certain conditions, and the transfer for compensation in a trust, under specified conditions. 4. Specifies that a "life settlement contract" does not include any of the following: A. A policy loan by a life insurance company pursuant to the terms of the life insurance policy or accelerated death provisions contained in the life insurance policy. B. A premium finance loan or any loan made by a bank or other licensed financial institution, provided that neither default on the loan nor the transfer of the policy in connection with the default is pursuant to an agreement or understanding with another person for the purpose of evading regulation under this bill. C. A collateral assignment of a life insurance policy by an owner. D. An agreement where all of the parties satisfy one of the following conditions: (1) They are closely related to the insured by blood or law. (2) They have a lawful substantial economic interest in the continued life, health, and bodily safety of the person insured. (3) They are trusts established primarily for the benefit of those parties. SB 98, Page 5 E. Any designation or agreement by an insured who is an employee of an employer in connection with the purchase by the employer, or by a trust established by the employer, of life insurance on the life of the employee. F. Bona fide business succession planning arrangements that meet specified criteria. G. Any other contract or arrangement from the definition of "life settlement contract" that the Insurance Commissioner determines is not of the type intended to be regulated by this act. 5. Defines "stranger-originated life insurance (STOLI)" as an act, practice, or arrangement to initiate the issuance of a life insurance policy in this state for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest, under the laws of this state, in the life of the insured. 6. Specifies that STOLI practices include cases in which life insurance is purchased with resources or guarantees from or through a person or entity, that at the time of policy inception, could not lawfully initiate the policy himself, herself, or itself, and where at the time of inception, there is an arrangement or agreement to directly or indirectly transfer the ownership of the policy or the policy benefits to a third party. 7. Defines "terminally ill" as having an illness or sickness that can reasonably be expected to result in death in 24 months or less. 8. Repeals the provisions of existing law regarding viatical settlements and, instead, establish a series of requirements and authorities in connection with the transaction of life settlements. 9. Prohibits persons from entering into, brokering, or soliciting life settlements unless that person has been licensed by the Insurance Commissioner. The person shall file an application with information required by the Insurance Commissioner, and accompanied by a fee set by the Insurance Commissioner. The license fee for a provider license is not SB 98, Page 6 specified in the bill but must be reasonable as determined by the Insurance Commissioner. The license fee for a broker shall not exceed the license fee established for an insurance producer who is acting as life settlement broker. Each broker licensee shall pay an annual renewal fee of $177. 10. Requires a person acting as a broker to complete at least 15 hours of continuing education regarding life settlements as required by the Insurance Commissioner, prior to operating as a broker. This requirement does not apply to a life insurance agent who has been licensed for at least one year. 11. Specifies that a person licensed as an attorney, certified public accountant, or financial planner, who is retained to represent the owner, and whose compensation is not paid by the provider or purchaser, may negotiate a life settlement contract on behalf of the owner without having to obtain a license as a broker. 12. Provides that a person licensed to act as a viatical settlement broker or provider as of December 31, 2008, shall be deemed qualified for licensure as a life settlement broker or provider. 13. Specifies that the insurer that issued the policy that is the subject of a life settlement contract shall not be responsible for any act or omission of a broker or provider in connection with the life settlement transaction, unless the insurer receives compensation for the replacement of the life settlement contract for the provider or broker. 14. Authorizes the Insurance Commissioner to suspend or revoke a person's license to transact life settlements when, after a hearing, the Insurance Commissioner concludes that it is in the public interest. 15. Requires a life settlements licensee to file with the Insurance Commissioner a copy of all life settlement forms, and prohibits licensees from using any life settlement form unless it has been provided in advance to the Insurance Commissioner. 16. Authorizes the Insurance Commissioner to disapprove a life settlement form if, in the Insurance Commissioner's discretion, the form is contrary to the interests SB 98, Page 7 of the public, or otherwise misleading or unfair to the consumer. 17. Requires life settlement licensees to provide an applicant for a life settlement contract a series of disclosures in writing including that there are possible alternatives to life settlements, including accelerated benefits options that may be offered by the life insurer, and that proceeds of a life settlement may be taxable and that assistance should be sought from a professional tax advisor. 18. Requires the broker to provide the owner and the insured a series of disclosures in writing prior to the signing of the life settlement contract, including a complete description of all of the offers, counteroffers, acceptances, and rejections relating to the proposed life settlement contract, and a disclosure of any affiliations or contractual arrangements between the broker and any person making an offer in connection with the proposed life settlement contract. 19. Allows insurance carriers to inquire in the application for insurance whether the proposed owner intends to pay premiums with the assistance of financing from a lender that will use the policy as collateral to support the financing. 20. Specifies that if the loan provides funds for a purpose other than paying for the premiums, costs, and expenses associated with obtaining and maintaining the life insurance policy and loan, the application may be rejected as a violation of a prohibited practice under this bill. Otherwise, the insurer may not reject the application solely because the premiums will be financed, and the insurance carrier may make disclosures to the applicant to be completed no later than the delivery of the policy. The disclosure shall state: "If you have entered into a loan arrangement where the policy is used as collateral, and the policy changes ownership at some point in the future in satisfaction of the loan, the following may be true: (1) A change of ownership could lead to a stranger owning an interest in the insured's life. (2) A change of ownership could in the future limit your ability to purchase insurance on the insured's life." SB 98, Page 8 21. Allows an insurance carrier to require the following certifications from the applicant or the insured: A. I have not entered into any agreement or arrangement under which I have agreed to make a future sale of this life insurance policy. B. My loan arrangement for this policy provides funds sufficient to pay for some or all of the premiums, costs, and expenses associated with obtaining and maintaining my life insurance policy, but I have not entered into any agreement by which I am to receive consideration in exchange for procuring this policy. C. The borrower has an insurable interest in the insured. 22. Requires life insurers to provide individual policyholders with a statement informing them that if they are considering making changes in the status of their policy, they should consult with a licensed insurance or financial advisor. 23. Authorizes the Insurance Commissioner to adopt rules and regulations reasonably necessary to govern life settlements and transactions. 24. Authorizes the Insurance Commissioner to investigate the conduct of any licensee, employees, agents or other persons involved in the business of the licensee. 25. Requires licensed providers to file with the Insurance Commissioner an annual statement that includes the total number, aggregate face amount, and life settlement proceeds of policies settled during the immediately preceding year. This statement shall also include the names of the insurance companies whose policies have been settled and the brokers that have settled those policies. 26. Prohibits any licensed person from engaging in false or misleading advertising, solicitation, or practice, as specified. The penalties for a violation are a fine of up to three times the amount of the loss, a license suspension, and up to one year imprisonment in the county jail. 27. Allows any person who enters into a life settlement with a life settlement licensee to rescind the settlement within 30 days of the date it is executed, or 15 days SB 98, Page 9 from receipt of the proceeds of the settlement, whichever is sooner. 28. Requires a provider entering into a life settlement contract with an owner of a policy, when the insured is terminally ill, to first obtain the following: A. If the owner is the insured, a written statement from a licensed physician that the owner is of sound mind and under no constraint or undue influence to enter into a settlement contract. B. A document in which the insured consents to the release of his/her medical records. 29. Requires a provider to obtain a witnessed document in which the owner consents to the settlement contract, represents that the owner has a complete understanding of the settlement contract and of the benefits of the policy, and for persons with a terminal illness, acknowledges the terminal illness was diagnosed after the policy was issued. 30. Prohibits a person from entering into a life settlement during a two-year period commencing with the date of issuance of the policy, except: A. If the owner certifies to the provider that the policy was issued upon the owner's exercise of conversion rights arising out of a policy, provided the total of the time covered under the conversion policy plus the time covered under the policy is at least 24 months. B. If the owner submits independent evidence to the provider that any of the following conditions exist: (1) The owner or insured is terminally ill. (2) The owner or insured disposes of his/her ownership interests in a closely held corporation, pursuant to the terms a buyout in effect at the time the insurance policy was initially issued. (3) The owner's spouse dies. (4) The owner divorces. SB 98, Page 10 (5) The owner retires from full-time employment. (6) The owner becomes physically or mentally disabled. (7) The owner is bankrupt or insolvent. 31. Prohibits an insurer from engaging in any transaction or act that restricts or impairs the lawful transfer of ownership, change of beneficiary, or assignment of a policy. Insurers would also be prohibited from making any false or misleading statement for the purpose of dissuading an owner or insured from a lawful life settlement contract. 32. Prohibits a person providing premium financing from receiving proceeds, fees, or other consideration from the policy or owner of the policy that are in addition to the amounts required to pay principal, interest, and any reasonable costs or expenses incurred by the lender or borrower in connection with the premium finance agreement. 33. Makes it a fraudulent life settlement act and a violation of law for any person to enter into a life settlement contract if a person knows that the life insurance policy was obtained by means of a false, deceptive, or misleading application for the policy, or to issue, solicit, or market the purchase of a new insurance policy for the purpose of settling the policy. 34. Requires life settlement contracts and applications for life settlement contracts to contain the following statement: "Any person who knowingly presents false information in an application for insurance or for a life settlement contract may be subject to criminal or civil liability." 35. Allows a provider lawfully transacting business prior to the effective date of this bill to continue to do so, pending approval or disapproval of that person's application for a license as long as the application is filed with the Insurance Commissioner within 30 days after publication by the Insurance Commissioner of an application form and instructions. SB 98, Page 11 36. Allows a person who has lawfully acted as a broker and negotiated life settlement contracts between any owner and one or more providers for at least one year prior to the effective date of this bill to continue to do so pending approval or disapproval of that person's application for a license, provided the application is filed within 30 days of publication of the application form and instructions. 37. Authorizes the adoption of emergency regulations by the Department of Insurance (CDI) and for these regulations to remain in effect until repealed by that department. 38. Provides that this bill does not apply to life settlement contracts entered into before July 1, 2010, with one exception, and that the bill applies to transactions involving life insurance policies in effect after the operative date of this bill. 39. Expresses legislative findings and declarations that there is a compelling interest in regulating the life insurance industry to protect consumers, and that interest is promoted by encouraging the life settlement industry to make full and thorough disclosure of information to the Insurance Commissioner by providing confidentiality for that information. COMMENTS 1. Purpose of the bill The purpose of SB 98 is to comprehensively establish a regulatory system governing life settlement transactions in California, including provisions to make illegal the practice of Stranger Originated Life Insurance (STOLI) and to establish new measures to aid in detecting and preventing STOLI transactions. The bill is patterned on SB 1543 (Machado) of the prior legislative session which was sent to the Governor but vetoed last fall. Background The Senate Banking, Finance and Insurance Committee held an informational hearing in February 2008 on the topic of life settlement contracts. A life settlement is a financial transaction in which an owner of a life insurance policy sells the policy to a third party for more than the cash value offered by the life insurance company. The purchaser becomes the new beneficiary of the policy at maturity and is responsible for all SB 98, Page 12 subsequent premium payments. Capital from hedge funds, investment banks, pension funds, and other sources in search of higher returns are flowing into the life settlement market. Life settlements are a new market that is growing rapidly. These settlements have grown from a few billion dollars less than a decade ago to an estimated $13 billion in 2006, and are expected to grow to an estimated $150 billion in the next decade. However, life settlements are largely unregulated in California. There are no licensing requirements or standards for individuals acting as brokers or advising people in these complex transactions. Senior citizens are the primary market for life settlements. This can include instances when seniors are planning to surrender their life insurance or let it lapse. According to marketing from the life settlement industry, other reasons for seniors to sell their policies include the use of the proceeds to purchase a new life insurance policy or a long-term care contract, collect immediate cash, make a gift to a family member, pay divorce costs, and obtain funds for other investments. Life Settlements. Life settlements can be highly complex transactions and have great benefits, or serious negative effects, for seniors involved. Several witnesses at the Senate informational hearing testified that they were presented with a two-inch thick stack of legal documents at the closing of the settlement contract. The life settlement market has grown out of the viaticals market that developed in the 1980s in response to the crisis. Viatical settlements involved the sale of life insurance policies by persons facing a life expectancy of 24 months or less, for an amount less than the death benefit but more than the cash surrender value, to pay for end-of-life care. The desperate circumstances of the sellers raised the potential for abuse, and the Legislature in 1990 enacted legislation to regulate viatical sales. Anyone selling viatical settlements must be licensed and must provide disclosures to the seller, including possible alternatives to settlement, possible tax consequences, and issues relating to the confidentiality of medical information. The viatical market largely evaporated after medical advances dramatically altered the life expectancy of an AIDS diagnosis. SB 98, Page 13 In 2001, a significant number of life settlement providers started purchasing policies for their investment portfolios using institutional capital. The arrival of well-funded corporate entities transformed the settlement concept into a wealth management tool, and began driving a rapid market expansion. Both the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL) have produced model acts to regulate life settlements. A primary difference between the two model acts is that in the NAIC act, an owner would wait for five years after purchasing a policy (with financed funds) before being able to enter into a life settlement, while under the NCOIL act, the policy owner may settle after two years. SB 1543 is largely based on the NCOIL Model Act. Non-Recourse Premium Financing. In non-recourse premium financing, the insured person uses a loan to purchase a life insurance policy and pay the premiums, and the policy is the sole collateral for repayment of the loan. Although normally the insured has an option to repay the loan at the end of the two-year contestability period, some reports suggest that some lenders have structured their programs to discourage loan repayment through use of high exit fees and other costs, so that at the end of the two-year contestability period the ownership of the policy will be transferred to the lender in satisfaction of the loan or sold to investors or a settlement company. Alternatively, the policyholder may have been promised a percentage of the net profits of the sale of the policy as an inducement to take out the "free" insurance. How to ensure that non-recourse premium financing is available to individuals as a legitimate method to purchase needed life insurance, while prohibiting the use of non-recourse premium financing as part of a STOLI transaction, remains the crux of the debate between the life insurance and life settlement industries. 1.Arguments in Support. The Association of California Life and Health Insurance Companies, which supports the bill, states that this bill is necessary to curb predatory practices upon seniors and other consumers known as "stranger-originated life insurance," or STOLI. The need to curb STOLI transactions has already been recognized by 10 or more states which have approved legislation as strong as SB 1543, including Ohio, Indiana, Connecticut, Oklahoma, Kansas, Maine, West Virginia, Iowa, SB 98, Page 14 Nebraska, and North Dakota. The Pacific Life Insurance Company states that, when abused, the sales of life insurance on the secondary market can expose life insurers and their reinsurers to a variety of risks. The primary risk is that buying and selling of insurance policies on the secondary market might be manipulated by a need to circumvent the restrictions of insurable interest laws. Establishing a framework where the purchase of life insurance is influenced by a strong possibility or certainty that the policy will placed in the secondary market, in a relatively short period of time, violates the purpose of life insurance. Life insurance is intended for individuals or businesses to provide protection and benefits, not for unrelated third party investors. The National Association of Insurance and Financial Advisors of California states that seniors are being hurt by STOLI transactions because they often do not understand the short and long-term consequences of these transactions. They are often unaware that the income derived from the STOLI transaction is generally taxable and that numerous fees and other expenses must be paid. They may also be unaware that by entering into a STOLI transaction, they could be affecting their available insurable capacity. The Life Insurance Settlement Association (LISA) states that life settlements represent an important option for people who choose to discontinue paying premiums on a policy that no longer serves its original purpose, and allows them to receive payoffs that can be significantly greater than surrendering a policy. This association supports this bill and its regulation of the life settlement market in which consumers have access to the market and receive consumer protections. It states "SB 98 establishes a regulatory framework for the growing life settlement industry in California. This bill will offer consumer protections and appropriate regulation of an emerging industry in California. This measure strengthens long-standing consumer property rights in life insurance while ensuring that consumers are aware of the issues facing them when exercising those rights." 2. Arguments in Opposition. The California Life Settlement Association (CALSA), which opposes the bill, states that the bill's vague definition of STOLI would prohibit the future use of premium financing. CALSA states allows the life SB 98, Page 15 insurance industry to control the options available to policyholders and to challenge virtually every transaction that they dislike. This association is composed of numerous life settlement providers and agents providing services for insured's throughout the state. This association also states that the bill indirectly prohibits policy applicants from the long established practice of both recourse and non-recourse premium financing which benefit consumers. CALSA asserts that premium financing is an important financial tool used by insured persons to purchase life insurance for purposes such as financial planning, estate planning, business transfers or any other lawful purpose. CALSA also states that to the extent the cumulative provisions of SB 98 preclude premium financing, the bill is anti-consumer because it would eliminate the future use of this important financing tool. Finally, CALSA asserts there has been no demonstrated problem which has been shown to exist in California nor why existing capabilities of life insurers to detect STOLI transactions during review of a life insurance application are not adequate. Roycroft Funding, LLC, opposes the bill because it places a two-year ban on the sale of policies which retracts existing consumer protections for seniors and stifles competition within the life settlement market. This reduction in competition would cost California seniors hundreds of millions of dollars for the benefit of a few large companies within the life settlement industry. The firm also states that the bill would have the unwanted effect of driving hundreds of millions of dollars in tax revenues from the State of California and will lead to a reduction in California and Estate Planning Business. 2. Prior Legislation Vetoed SB 1543 (Machado) was vetoed by the Governor last fall. In his veto message, the Governor stated: I am returning Senate Bill 1543 without my signature. This bill would enact the Life Settlement Consumer Protection Act of 2008. Specifically, this bill would create a regulatory framework for life settlements in California. Life settlements are complex SB 98, Page 16 financial transactions in which a life insurance policy owner possessing an unneeded or unwanted life insurance policy sells that policy to a third party for more than the cash value offered by the life insurance company. Life settlements have grown increasingly popular in recent years, especially with older Californians, raising questions of whether adequate regulations are in place to oversee the industry. While life settlement companies are already regulated by the California Department of Financial Institutions, proponents of this measure believe the Department of Insurance should play a greater role in regulating these companies as well. Although I share the proponents' goal to ensure that life settlement transactions are properly regulated, I cannot sign this measure at this time. The provisions of this bill were amended into it very late in the legislative session. While many of the provisions were agreed to by all the parties involved, some of the provisions are still subject to worthwhile debate. For instance, it is my desire to ensure that life settlement transactions contain proper notification and disclosure to consumers. I am also concerned that the final version of the bill may unfairly exclude some companies from participating in the legitimate life settlement market. I am asking my staff to convene meetings this fall with all the stakeholders to review the provisions of this bill and consider what, if any, changes are needed to ensure that any regulatory framework SB 98, Page 17 put into statute appropriately protects seniors, provides consumers with adequate disclosure, and does not unfairly discriminate against legitimate companies trying to compete in the life settlement business. It is my belief that any outstanding issues can be resolved and we can quickly pass any necessary legislation in 2009. 3. Questions 1. On page 34, line 30, a reference is made to regulations adopted or amended by the "state board". Should this be revised to refer to the Insurance Commissioner? 4. Prior Legislation SB 1224 (Machado) and SB 1543 (Machado) of the 2007-2008 Legislative Session. POSITIONS Support American Council of Life Insurers Association of California Life and Health Insurance Companies Pacifica, LLC Coventry First, LLC Life Insurance Settlement Association National Association of Insurance and Financial Advisors of California Support as Amended Pacific Life Insurance Company SB 98, Page 18 Oppose California Life Settlement Association Roycroft Funding LLC ING Consultant: Kenneth Cooley (916) 651-4772