BILL ANALYSIS
SB 98
Page 1
Date of Hearing: June 24, 2009
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 98 (Calderon) - As Amended: June 16, 2009
SUBJECT : Life insurance and life settlements.
SUMMARY : 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 (IC) to
disapprove life settlement forms, requires specified disclosures
to consumers including a notice of possible alternatives to life
settlements, and prohibits predatory practices such as false and
misleading statements. Specifically, 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.
2)Defines "provider" 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.)
3)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 the
insured party, violate the insurable interest laws and the
prohibition against wagering on life.
4)Specifies that a "life settlement contract" does not include
any of the following:
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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 are either closely
related to the insured by blood or law; have a lawful
substantial economic interest in the continued life,
health, and bodily safety of the person insured; or are
trusts established primarily for the benefit of those
parties.
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)Repeals the provisions of existing law regarding viatical
settlements and, instead, establishes a series of requirements
and authorities in connection with the transaction of life
settlements.
8)Prohibits persons from entering into, brokering, or soliciting
life settlements unless that person has been licensed by the
Insurance Commissioner (IC). Exempts attorneys, certified
public accountants, and financial planners who represent the
owner and are not paid by the provider or purchaser from the
licensing requirement. A person interested in becoming
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licensed shall file an application with the information
required by the IC, and accompanied by a fee set by the IC.
The license fee for a provider license shall be reasonable and
sufficient to cover the costs incurred by the CDI. The
license fee for a broker shall not exceed the license fee
established for an insurance producer who is acting as a life
settlement broker. Each broker licensee shall pay an annual
renewal fee of $177.
9)Requires a person acting as a broker to complete at least 15
hours of continuing education regarding life settlements as
required by the IC, 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.
10)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.
11)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.
12)Authorizes the IC to suspend or revoke a person's license to
transact life settlements when, after a hearing, the IC
concludes that it is in the public interest.
13)Requires a life settlements licensee to file with the IC 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 IC.
14)Authorizes the IC to disapprove a life settlement form if, in
the IC's discretion, the form is contrary to the interests of
the public, or otherwise misleading or unfair to the consumer.
15)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
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be offered by the life insurer, that proceeds of a life
settlement may be taxable, that assistance should be sought
from a professional tax advisor, and that a change in
ownership of the settled policy could limit the insured's
ability to purchase insurance in the future because there is a
limit to how much coverage insurers will issue on one life.
16)Requires the life settlement provider, prior to executing a
life settlement contract, to provide the owner the gross
purchase price that the provider is paying for the policy, the
amount of the purchase price to be paid to the owner, the
amount of the purchase price to be paid to the owner's life
settlement broker, and the name, business address, and
telephone number of the life settlement broker. "Gross
purchase price" is defined as the total amount or value paid
by the provider for the purchase of one or more life insurance
policies, including commissions and fees.
17)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, 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, and a
reconciliation of the gross offer or bid by the provider
(including commissions and fees) to the net amount of proceeds
or value to be received by the owner.
18)Allows insurers to pose a series of questions to prospective
life insurance applicants to determine if premiums will be
paid with assistance of financing from a lender that will use
the policy as collateral to support the financing.
19)Authorizes insurers to reject a life insurance application
from a person who uses premium finance loan funds for a
purpose other than paying for the premiums, costs, and
expenses associated with obtaining and maintaining the life
insurance policy and loan. Otherwise, the insurer may not
reject the application solely because the premiums will be
financed, and the insurance carrier may make specified
disclosures to the applicant.
20)Allows an insurance carrier to require the following
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certifications from the applicant or the insured:
a) That he or she has not entered into any agreement or
arrangement for a future sale of the life insurance policy.
b) The loan arrangement for the policy provides funds
sufficient to pay for some or all of the premiums, costs,
and expenses associated with obtaining and maintaining the
life insurance policy, but the applicant or insured has not
entered into any agreement to receive consideration in
exchange for procuring the policy.
c) The borrower has an insurable interest in the insured.
21)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.
22)Authorizes the IC to adopt rules and regulations reasonably
necessary to govern life settlements and transactions, and to
investigate the conduct of any licensee, employees, agents or
other persons involved in the business of the licensee.
23)Prohibits any licensed person from engaging in any false or
misleading advertising, solicitation, or practice. 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.
24)Allows anyone who owns a life settlement contract to rescind
the contract within 30 days after it is executed, or 15 days
from receipt of the full payment of the proceeds, whichever is
sooner.
25)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 or her medical records.
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26)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.
27)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; or
b) If the owner submits independent evidence to the
provider that the owner or insured is terminally ill; the
owner or insured disposes of his or her ownership interests
in a closely held corporation pursuant to the terms of a
buyout in effect at the time the insurance policy was
initially issued; the owner's spouse dies; the owner
divorces; the owner retires from full-time employment; the
owner becomes physically or mentally disabled; or the owner
is bankrupt or insolvent.
28)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.
29)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, except in the event of a
default.
30)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
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means of a false, deceptive, or misleading application for the
policy, or to issue, solicit, or market the purchase of a new
life insurance policy for the purpose of settling the policy.
31)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."
32)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 IC within
30 days after publication by the IC of an application form and
instructions.
33)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.
34)Authorizes the adoption of emergency regulations by the DOI
and for these regulations to remain in effect until repealed
by that department.
35)Provides that this bill does not apply to life settlement
contracts entered into before July 1, 2010, unless the
policies are issued on or after the effective date of the
bill. The bill applies to transactions involving life
insurance policies in effect on and after the operative date
of this bill.
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
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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 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 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)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 IC. An
application for a license must be accompanied by a fee of
$2,833 and the applicant must provide any information required
by the IC. 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
IC. Any form filed with the IC by a licensee is deemed
approved if it is not disapproved within 60 days. The IC must
disapprove a viatical settlement form if the IC finds the form
is contrary to the interests of the public, or otherwise
misleading or unfair to the consumer.
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8)Requires viatical settlements licensees to disclose to
applicants, at the time of solicitation for the viatical
settlement, the possible alternatives to viatical settlements
for persons with catastrophic or life-threatening illness,
including accelerated benefits options that may be 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 IC to adopt regulations reasonably necessary to
govern viatical settlements and transactions and requires the
IC to adopt regulations to address those conflicts of interest
that may arise.
10)Authorizes the IC to examine the business and affairs of any
licensee or applicant for a licensee. 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.
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.
FISCAL EFFECT :
1)Annual fee-supported special fund costs of $1.7 million to the
Department of Insurance to provide licensure and oversight of
the life settlement industry. This funding, generated by
license fees, supports Department staff, including counsel,
investigators, and support staff.
2)Potential impact on insurance premium taxes and personal
income taxes, to the extent this bill affects the number and
value of life insurance policies purchased and/or the timing
and magnitude of life settlement transactions occurring in
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California. The size of any such impact is not possible to
quantify, given the limited information available on the scope
and nature of life settlement transactions occurring under
existing law. However, any changes in tax revenues related to
this bill would not appear to be major.
COMMENTS :
1)Purpose of bill. The purposes of this bill are to regulate
the growing secondary market for life insurance policies,
provide disclosures to consumers, and encourage the life
settlement industry to make full disclosures of information to
the IC in order to protect consumers.
2)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 is
flowing into the life settlement market.
Life settlements are a new market that has grown significantly
in recent years. These settlements are expected to grow from
$7 billion in 2006 to $15 billion by 2016. 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.
3)Life settlements. Life settlements can be highly complex
transactions and have great benefits, or serious negative
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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 1980's in response to the AIDS
crises. 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. This bill
is largely based on the NCOIL Model Act.
4)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 person 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
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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. This bill takes several steps including
prohibiting STOLI transactions and requiring licensing, but
the California Life Settlement Association remains opposed to
the bill unless it is amended to clarify that lawful
non-recourse premium financing would be allowed by the bill.
5)Support arguments. The Association of California Life and
Health Insurance Companies states that this bill is necessary
to curb predatory practices upon seniors and other consumers
known as "stranger-originated life insurance," or STOLI. This
association states that in STOLI schemes, investors entice
seniors to take out policies and then profit when they die.
Also, STOLI threatens to expose consumers to unexpected taxes,
loss of privacy, and inability to obtain life insurance in the
future.
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
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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.
Coventry First states this bill would promote the detection
and prevention of STOLI policies by:
a) Prohibiting trusts and premium financing arrangements
from being used to facilitate STOLI transactions or act as
a cloak for STOLI;
b) Establishing a prohibition on the transfer of ownership
of a policy prior to the issuance of a policy, or for a
2-year period thereafter, which is consistent with the
contestability period for life insurance policies; and
c) Providing insurers with various tools to detect and
block STOLI transactions.
6)Opposition arguments. The California Life Settlement
Association (CALSA) states that this bill fails to address the
Governor's veto message of SB 1543 (of last Session) regarding
the "proper notification and disclosures to consumers" and
"unfairly excludes some companies from participating in the
legitimate life settlement market." This association is
composed of numerous life settlement providers and agents
providing services for insured's throughout the state.
CALSA states that the bill would enact an indirect ban on
non-recourse premium financing, as a result of the ambiguous
language of the STOLI definition contained in the bill. Also,
the bill language could inadvertently preclude innocent
activity of life insurance purchasers and criminalize the
activity of seniors who seek otherwise lawful non-recourse
premium financing that is now used by small businesses,
farmers, and others as a legitimate financial planning tool in
estate planning and business transfers. CALSA also states
that there is scant if any evidence of a problem being
addressed by the bill: in 2007 the Department of Insurance
(CDI) only received one complaint about a life settlement and
that since that time the CDI reports a lack of documented
complaints. Additionally, CALSA argues:
a) Life insurers already have the ability to control
alleged life settlement abuses. They can do this already
during the application review process and deny issuance of
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a policy.
b) The bill's provisions are constitutionally suspect as an
impairment of contracts. The bill would impose limits on
policyholder's contracts existing on the effective date of
this law and would thereby constitute a retroactive
impairment of those contract rights. This may lead to
litigation.
c) The potential loss of state revenue. To the extent the
ambiguous provisions of the bill reduce the dollar amount
of life settlements in California, there could be a
reduction in the amount of income tax revenue paid to the
state.
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
because people desiring to settle their policies will arrange
the transaction in other states.
ING opposes the bill because it contains the following
language: "the existence of premium financing may not be the
sole criterion employed by an insurer in a decision whether to
reject an application for life insurance." (Page 19, lines 11
-14, of bill) Thus, ING argues, if an insurer finds out that
the premiums are being financed, the insurer must write the
policy unless it can find another reason to reject it.
Further, insurers that are serious about dealing with STOLI
will face litigation for denial of coverage.
7)Clarifying amendment. The bill defines the term
"stranger-originated life insurance or STOLI" as an act or
arrangement to initiate the issuance of a life insurance
policy for the benefit of 3rd-party investor who, at the time
of policy origination, has no insurable interest in the life
of the insured person. The bill also states that STOLI
arrangements do not include otherwise lawful life settlement
contracts as permitted by this bill. Since there is some
ambiguity in the phrase "otherwise lawful life settlement
contracts as permitted", the author may consider amending the
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bill to read as follows on page 12, lines 7 - 9:
STOLI arrangements do not include otherwise lawful life
settlement contracts as permitted by the act that added
this section or those practices set forth in paragraph (2)
of subdivision (k), provided they are not for the purpose
of evading regulation under this act .
SUPPORT / OPPOSITION:
Support
Association of California Life & Health Insurance Companies
(ACLHIC)
Civil Justice Association of California (CJAC)
Coventry First
National Association of Insurance and Financial Advisors of
California (NAIFA-California)
North Star Life Services LLC (formerly Pacifica Group LLC)
Pacific Life Insurance Companies
American Council of Life Insurers (ACLI) (Support with
reservations)
Opposition
California Life Settlement Association (CALSA)
John Hancock Life Insurance Company
Roycroft Funding
ING (Oppose unless amended)
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086