The hottest topic of conversation among lawmakers throughout the country concerning life settlements continues to be Stranger Originated Life Insurance, or "STOLI." Among various alternatives, recently enacted legislation has included:
Insurable interest and anti-STOLI laws: Several states have now enacted statutes that expressly declare STOLI programs to be illegal. Minnesota recently amended its insurable interest laws with respect to policies issued after the May 2009 effective date of the law, to provide that any settlement within four years after the issue date is presumed to be a STOLI transaction. That presumption may be countered, however, and the policy can be settled within that four-year period if it can be affirmatively proven that the policy was not a STOLI product. Specific requirements are set forth in the statute to define what is satisfactory proof on this point. Even in the absence of an expressly anti-STOLI statute, some experts believe that STOLI could potentially be deemed to be a form of fraud or a violation of insurable interest laws based on inferences drawn from current statutes and common law principles.
Extended waiting periods before policies may be settled: The majority rule in statutes that have addressed the issue is that a provider may not enter into a settlement contract prior to the expiration of two years following issuance of the policy. States that have adopted some form of the National Association of Insurance Commissioner's five-year rule include: Iowa, North Dakota, Nebraska, Nevada, Ohio, Oklahoma, Oregon, Vermont and West Virginia. There are certain exceptions stated under all two-year and five-year statutes, which vary widely from state to state.
Beneficial interest transfers: A few states have recently enacted legislation that expressly includes within the definition of a "settlement contract" any transfer of beneficial interests in an insurance trust or other vehicle established for the primary purpose of owning one or more life insurance policies. In other states, an argument could be made that such transfers should be covered by settlement laws that govern "indirect" transfers of a policy or transfers of the beneficial interest in a policy.
Non-recourse premium financing: On a consistent basis, settlement laws adopted in 2008 and 2009 have identified non-recourse premium finance transactions as either falling within the definition of a "settlement contract," as a primary element of consideration under anti-STOLI provisions, or both. Exceptions are often provided, which vary by state.
Disclosures: Lawmakers also remain focused on disclosure requirements, as more states adopt or amend requirements for disclosures to be given to policyowners. Some examples:
o Specific requirements as to the form and content of commission disclosures. Some states now expressly require that commissions be disclosed as a percentage of the total proceeds from the settlement. Vermont now limits broker compensation to no more than 2% of the amount paid to the policyowner.
o Industry participants have argued that carriers should be required to provide disclosures to policyowners alerting them to the possibility of settlement as an alternative to letting a policy lapse or surrendering it for cash value. Maine and Washington have recently enacted such requirements.
State legislative landscape
Observers of legislative and regulatory activities continue to see significant interest in the life settlement industry in a majority of states. So far in 2009, six states enacted new life settlement laws, while 10 other states have amended existing life settlement acts. Sixteen states have still not enacted any laws regulating life settlements, but legislation is pending in six of them.
As of August 2009, following is a recap of settlement legislation:
o States that have adopted life settlement laws: Alaska, Ark., Colo. Conn., Fla., Ga., Hawaii, Idaho, Iowa, Ill. (effective July 2010), Ind., Ky., Kan., La., Mass., Md., Maine, Minn., Miss., Mont., Neb, N.J., Nev., N.C., N.D., Ohio, Okla., Ore. (effective Jan. 2010), Pa., Tenn., Texas, Utah, Vt. (effective July 2009 and Jan. 2010), Va., Wash. and W.V.
o States that have recently amended previously enacted life settlement laws: Ark., Ga., Iowa, Maine, Mont., Nev., N.D., Tenn., Utah and W.V.
o States that currently regulate only viaticals: Calif., Del., Mass., Mich., N.M., N.Y. and Wis.
o States that have not enacted any settlement life or viatical settlement laws: Ala., Ariz., Mo., N.H., R.I., S.C., S.D., Wash. D.C. and Wyo.
o States with proposed legislation currently under review: Calif., Mass., Mich., N.J., N.Y., R.I., Tenn., Texas, and Wis.
o Administrative rule-making is currently in process or anticipated in the following states: Ark., Ga., Hawaii, Idaho, La., Mont., N.V., Ohio, Ore., Vt., Wash. and W.V.
In May 2009, the IRS released two rulings related to the taxation of proceeds from settlements as capital gains or ordinary income, or a combination of both. Revenue Ruling 2009-13 addresses the amount and characterization of income from the standpoint of a policyowner (other than an investor-owner) resulting either from the sale of a policy through a settlement or from surrender of the policy for cash value. The full text of the Revenue Ruling 2009-13 is available on the IRS Web site at http://www.irs.gov/pub/irs-drop/rr-09-13.pdf.
Revenue Ruling 2009-14 discusses tax treatment on a post-settlement basis, upon a buyer's receipt of the death benefits from a previously settled policy or upon re-sale of the policy, including discussion of calculation of the amount and characterization of income recognized under varying scenarios. Revenue Ruling 2009-14 can be downloaded from the IRS Web site at http://www.irs.gov/pub/irs-drop/rr-09-14.pdf.
Other potential tax changes being discussed include the potential elimination of deductibility of expenses associated with certain employer-owned policies. Another proposal would require settlement providers to file detailed informational returns setting forth all payments made to sellers and brokers in connection with the purchase of any policy. This proposal would also require insurance carriers to file informational returns upon payment of death benefits.
Proposals for federal regulation of the insurance industry
In February, a report entitled Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation was published by the U.S. Treasury Department addressing, among other issues, concerns over the "patchwork" approach and general lack of uniformity of insurance regulation at the state level. The report recommended establishment of an Office of National Insurance to "gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector."
Subsequent to publication of the Treasury report, the following bills were introduced in Congress:
HR 1880, National Insurance Consumer Protection Act, would establish the Office of National Insurance as recommended in the Treasury report and appointment of a National Insurance Commissioner whose primary duties would be to (1) oversee the organization, incorporation, operation, regulation and supervision of national insurers and national insurance agencies and shall issue charters therefore; and (2) license, regulate and supervise national insurance producers. HR 1880 also proposes the establishment of an optional national charter for insurance companies, as well as national licensing for producers.
HR 2554 proposes reestablishment of the National Association of Registered Agents and Brokers to provide for licensing, continuing education and other nonresident insurance producer qualification requirements to be dealt with on a multi-state basis.
HB 2609 seeks to establish an Office of Insurance Information, the Director of which would be responsible to (1) collect, analyze and disseminate information from state insurance departments and other sources; (2) coordinate efforts to establish policy on international insurance matters; (3) determine whether state regulations are consistent with federal policy; and (4) serve as an advisor to the Treasury representative on the Trade Promotion Coordinating Committee for promotion of the export of U.S. insurance products, among other duties of the office.
Federal watchdog group to study settlements industry
In April 2009, the Senate Special Committee on Aging held an informational hearing, captioned as Betting on Death in the Life Settlement Market -- What's at Stake for Seniors? The sponsor of the hearing invited certain lawmakers and industry players to discuss life settlements generally, securities law aspects of the settlement business, STOLI, and corresponding consumer interests. The written testimony of persons invited by the Committee to speak and a video of the hearing are available for review on the Committee's Web site at http://aging.senate.gov/hearing_detail.cfm?id=312228&
In follow up to the hearing, the Committee has requested that the U.S. Government Accountability Office (GAO) undertake a study of the settlement industry, focusing on three fairly broad questions:
1. What are the characteristics of the current market for life insurance settlements and the securitization of those settlements?
2. What concerns exist regarding life insurance settlements and securitizations for consumers, life insurers and investors?
3. How are life settlements and related securitizations and the associated participants and markets regulated and to what limitations, if any, exist with such regulation?
The GAO is the investigative arm of Congress, and is generally held in high regard as an independent non-partisan office. Any report issued by the GAO is likely to have great influence over future regulation of the industry.
Larry Simon is CEO, president and director of Life Settlement Solutions, Inc., a life settlement provider in San Diego that acts as a direct purchaser, using institutionally based funds. Mr. Simon is responsible for the executive management of LSS, long-range strategic planning and development, relationships with funding sources and brokers, and executive oversight of the general business affairs of the company.