As the life settlement industry continues to grow, professionals must focus on education, due diligence, and compliance to ensure that, while maximizing the opportunities presented by life settlements, they also minimize compliance risks. Professionals representing policy owners in the sale of a life insurance policy have certain fiduciary duties and, as such, must fully understand how to act in the best interests of their clients.
The regulatory landscape
Many state legislators have been particularly concerned with issues surrounding stranger originated life insurance (STOLI) practices. STOLI is a practice or plan to initiate 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 insured. Such practices violate insurable interest laws and are generally viewed as fraudulent or unethical. These concerns have been addressed in model act amendments introduced by NCOIL in 2007 and by the National Association of Insurance Commissioners (NAIC) in 2006. STOLI transactions may be deemed to violate insurable interest laws or newly enacted anti-STOLI laws in nearly all states -- even in so-called "unregulated" states that have not adopted life insurance settlement acts.
Because of the dynamic regulatory environment, and regardless of which model act one supports, professionals need to pay attention to developments in states where they conduct business and steer clear of any STOLI transactions.
Licensing requirements
Many states have licensing requirements that apply to financial professionals, producers, brokers, and settlement providers. All industry professionals need to pay close attention to these licensing requirements, as well as other individual state requirements and privacy laws.
Professionals must ensure that they are working with or through properly licensed sources.
Proper licensing should be verified before exchanging information with any person engaged in the business of life settlements. Professionals should also be wary of funding sources that operate solely in unregulated states or other firms that "rent out" state licenses to another firm.
Karen Huston Canoff is chief compliance officer and general counsel of Life Settlement Solutions. She can be reached at info@lifefirms.com or 858-576-8067
