BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 98 (Ron Calderon)
          As Amended  June 30, 2009
          Majority vote 

           SENATE VOTE  :37-1  
          
           INSURANCE           10-0        APPROPRIATIONS      16-0        
           
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          |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                      |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           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  







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            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  







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            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. 








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          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.  








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           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  







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            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  







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            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  







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            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.  








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            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 







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