BILL ANALYSIS
SB 98
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Date of Hearing: July 15, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
SB 98 (Calderon) - As Amended: June 30, 2009
Policy Committee: Insurance
Vote:10-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill creates a regulatory framework for "life settlements,"
life insurance transactions that involve the sale of a policy to
a third party for a lump sum payment. The third party retains
the insurance policy, pays premiums, and becomes the beneficiary
at policy maturation. Specifically, this bill:
1)Establishes licensure requirements administered by the
California Department of Insurance (CDI) for life settlement
industry professionals (agents, brokers, and providers).
Provides CDI authority to investigate and conduct anti-fraud
activities.
2)Defines stranger-originated life insurance transactions
(STOLIs) and includes STOLIs in fraudulent acts. (STOLIs occur
when a life insurance policy is initiated by a party with no
insurable interest in the insured.)
3)Establishes a two-year prohibition on entering a life
settlement following the issuance of an insurance policy with
specified exceptions.
4)Establishes several additional prohibitions and requirements
regarding life settlement transactions, marketing,
documentation, financing, contracting, and licensure.
FISCAL EFFECT
1)Annual fee-supported special fund costs of $450,000 to $1.2
million to CDI to provide licensure and oversight of the life
settlement industry. This funding, generated by annual
licensure fees, supports CDI staff, including counsel,
investigators, and support staff.
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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
California.
COMMENTS
1)Rationale . This bill, supported by a number of industry
groups, creates a regulatory framework for the life settlement
industry in California. In recent years, the life settlement
market has arisen in which wealthy elderly policy holders sell
their life insurance death benefits to investors, including
hedge funds and other institutional investors looking for new
sources of returns. This shift blurs the line between life
insurance providing benefits to heirs after a policy holder
dies and a speculative investment product. According to the
author, under current law, life settlement transactions are
largely unregulated and leave consumers at risk for fraudulent
activity or transactions in which the consumer does not fully
understand available choices and financial implications. This
rapidly expanding marketplace features numerous parties
interacting to buy and sell life insurance and arrange
settlements as a wealth management tool for individuals and
investors. Several provisions of the bill are based on
recommendations of the National Conference of Insurance
Legislators (NCOIL) Model Settlement Act and establish
licensure, increase disclosures, and prohibit fraudulent
practices including STOLIs.
2)The Rise of the Life Settlement Industry . Life insurance pays
benefits upon the death of the policy holder. It is usually
purchased to protect against the loss of income if a wage
earner passes away. The practice of selling the right to
death benefits associated with life insurance arose in the
1990s to provide medical and financial support to individuals
living with AIDS. These viatical settlements have since become
obsolete as AIDS has shifted from a terminal disease to a
chronic disease.
Prior to the rise of the life settlements, consumers with life
insurance policies they no longer needed had the choice to
either lapse in premium payments and forfeit the policy or
accept an insurer buy-back. For example, a consumer with a $1
million death benefit might have an insurer buy-back offer of
$50,000. In contrast, a life settlement transaction might
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generate a $200,000 offer, making the latter transaction more
appealing for the consumer. According to industry data, the
life settlement market in California is expected to grow from
$7 billion (2006) to $15 billion (2016) over ten years.
3)STOLI transactions, defined in this bill as fraudulent, have
garnered increased attention in recent years as the life
settlement industry has grown. Consumer groups in support of
this bill indicate that vulnerable seniors are approached with
increasing frequency and may fall subject to unscrupulous
marketing and promotion practices. Such practices often
involve a third party approaching a senior and offering to
help purchase life insurance for the individual with the
express plan to turn around and arrange for the sale of death
benefits associated with that policy.
4)Concerns . A range of concerns have been expressed about
several provisions of this bill. Opponents concerned about the
two-year waiting period prior to the life settlement
transaction indicate this provision will move significant
amounts of life settlement activity to states without such a
waiting period. Other opponents indicate the STOLI definition
could inadvertently limit non-recourse premium financing which
occurs when a consumer borrows funds to purchase life
insurance. In addition, some opponents indicate that evidence
of fraud and consumer problems in life settlement activities
is scant.
5)Related Legislation . SB 1543 (Calderon) in 2008 was very
similar to SB 98. SB 1543 was vetoed due to concerns about
inadequate disclosure requirements and a concern that some
companies would be excluded from the life settlement market
under the bill's requirements. According to some opponents of
SB 98, these veto concerns have not been fully addressed.
Analysis Prepared by : Mary Ader / APPR. / (916) 319-2081