BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 98|
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THIRD READING
Bill No: SB 98
Author: Calderon (D)
Amended: 5/28/09
Vote: 21
SEN. BANKING, FINANCE, AND INS. COMMITTEE : 10-0, 4/15/09
AYES: Calderon, Cogdill, Cox, Florez, Harman, Kehoe, Liu,
Lowenthal, Runner, Wolk
NO VOTE RECORDED: Correa, Padilla
SENATE APPROPRIATIONS COMMITTEE : 12-0, 5/28/09
AYES: Kehoe, Cox, Corbett, Denham, DeSaulnier, Hancock,
Leno, Oropeza, Runner, Walters, Wyland, Yee
NO VOTE RECORDED: Wolk
SUBJECT : Life insurance: contracts and viatical
settlements
SOURCE : Author
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
CONTINUED
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as false and misleading statements.
ANALYSIS :
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
be 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
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 (IC) 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.Prohibits anyone from entering into or soliciting
viatical settlements unless the person has been licensed
by the IC.
5.Prohibits a viatical settlements licensee from using any
viatical settlement form unless it has been approved by
the IC.
6.Authorizes the IC to adopt regulations reasonably
necessary to govern viatical settlements and
transactions and requires the IC to adopt regulations to
address conflicts of interest that may arise.
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7.Authorizes the IC to examine the business and affairs of
any licensee or applicant for a license. The IC 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.
8. 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.
9.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 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.)
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.
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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.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.
5.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 now 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.
6.Prohibits persons from entering into, brokering, or
soliciting life settlements unless that person has been
licensed by the IC. shall pay an annual renewal fee in
an amount to be determined by the IC.
7.Provides that a person licensed to act as a viatical
settlement broker or provider as of December 31, 2009,
shall be deemed qualified for licensure as a life
settlement broker or provider.
8.Authorizes the IC to suspend or revoke a person's
license to transact life settlements when, after a
hearing, the IC concluded that it is in the public
interest.
9.Requires a 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
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broker and any person making an offer in connection with
the proposed life settlement contract.
10.Authorizes the IC to adopt rules and regulations
reasonably necessary to govern life settlements and
transactions, and authorizes the IC to investigate the
conduct of any licensee, employees, agents or other
persons involved in the business of the licensee.
11.Requires licensed providers to file with the IC 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.
12.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
from receipt of the proceeds of the settlement,
whichever is sooner.
13.Prohibits a person from entering into a life settlement
during a two-year period commencing with the date of
issuance of the policy, as specified.
14.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.
15.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."
16.Authorizes the adoption of emergency regulations by the
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Department of Insurance (DOI) and for these regulations
to remain in effect until repealed by that department.
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 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
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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.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11
2011-12 Fund
CDI regulatory costs $262 $105-$195
$536-$1,158 Special*
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CDI enforcement Unknown, but likely an amount
sufficient Special*
and fee revenue to support the costs of
providing this
licensing category
*Insurance Fund
SUPPORT : (Verified 5/29/09)
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
OPPOSITION : (Verified 5/29/09)
California Life Settlement Association
Roycroft Funding LLC
ING
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, 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
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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.
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 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.
CALSA 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.
JJA:cm 5/29/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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