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
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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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