BILL ANALYSIS SB 98 Page 1 SENATE THIRD READING SB 98 (Ron Calderon) As Amended June 30, 2009 Majority vote SENATE VOTE :37-1 INSURANCE 10-0 APPROPRIATIONS 16-0 ----------------------------------------------------------------- |Ayes:|Solorio, Garrick, |Ayes:|De Leon, Conway, Ammiano, | | |Anderson, | | | | |Charles Calderon, Carter, | |Charles Calderon, Coto, | | |Feuer, Hayashi, Nava, | |Davis, | | |Niello, Torres | |Fuentes, Hall, Harkey, | | | | |Miller, | | | | |Nielsen, Skinner, | | | | |Solorio, | | | | |Audra Strickland, | | | | |Torlakson, | | | | |Hill | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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, 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 in which the 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 and in which the minimum value for a life settlement contract shall be greater than a cash surrender value or accelerated death benefit. Generally, the "provider" is the person who is buying the policy. 2)Specifies that a "life settlement contract" does not include a SB 98 Page 2 loan by a life insurance company pursuant to the terms of the life insurance policy, certain loans made by a bank or other licensed financial institution, a collateral assignment of a life insurance policy by an owner, or an agreement where all of the parties are either closely related to the insured by blood or law or have a lawful substantial economic interest in the continued life and health of the person insured or are trusts established primarily for the benefit of those parties. 3)Defines "stranger-originated life insurance" (STOLI) as an act or arrangement to initiate the issuance of a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the life of the insured. 4)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. 5)Prohibits persons from entering into, brokering, or soliciting life settlements unless that person has been licensed by the Insurance Commissioner (IC). A person interested in becoming licensed shall file an application with the information required by the IC, and accompanied by a fee set by the IC. 6)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. 7)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. The IC would be authorized to disapprove a life settlement form if the form is contrary to the interests of the public or otherwise misleading or unfair to the consumer. 8)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 SB 98 Page 3 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. 9)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. 10)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. 11)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. 12)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. 13)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. SB 98 Page 4 14)Prohibits any licensed person from engaging in any false or misleading advertising, solicitation, or practice. 15)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. 16)Prohibits a person from entering into a life settlement during a 2-year period commencing with the issuance of the policy, except as specified. The exceptions are 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 in which the total time covered under the conversion policy and the time covered under the policy is at least 24 months, or 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. 17)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. 18)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. 19)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 life insurance policy for the purpose of settling the policy. SB 98 Page 5 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)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. 3)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. 4)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. 5)Prohibits anyone from entering into or soliciting viatical settlements unless the person has been licensed by the IC. 6)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. 7)Requires viatical settlements licensees to disclose to SB 98 Page 6 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. 8)Prohibits any person licensed to sell or solicit viatical settlements from engaging in any false or misleading advertising, solicitation, or practice. 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. 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 license fees, supports CDI 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 California. COMMENTS : 1)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)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 SB 98 Page 7 other sources in search of higher returns is flowing into the life settlement market. 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 can be highly complex transactions and have great benefits, or serious negative effects, for seniors involved. Several witnesses at a 2008 informational hearing of the Senate Banking, Finance and Insurance Committee 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 grew 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 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. 4)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 SB 98 Page 8 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. 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)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. SB 98 Page 9 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. 6)The California Life Settlement Association (CALSA) states that this bill fails to address the Governor's veto message of SB 1543 of the 2007-2208 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. 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 18, lines 36 - 39 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. Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086 SB 98 Page 10 FN: 0002565