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Morris Manning & Martin, LLP

NAIC Life Insurance and Annuities (A) Committee Adopts Changes to Viatical Settlements Model Act


On December 10, 2006, the NAIC Life Insurance and Annuities (A) Committee approved significant changes to the Viatical Settlements Model Act.  The changes are scheduled to be considered by the full NAIC at the 2007 Spring National Meeting in March.

The amendments approved by the Committee are aimed primarily at curtailing “investor-initiated life insurance” or, as it has been termed more recently, “stranger-initiated life insurance.” To this end, the amendments establish a five-year prohibition on the settlement of a policy following issuance, except under certain narrowly defined circumstances.

The Committee was especially concerned with certain premium finance arrangements that it considered to be designed to produce high-value policies for sale on the secondary market. Thus, the approved amendments define a “viatical settlement contract” subject to the five-year prohibition to include a premium finance loan where any of the following apply:

  • The loan proceeds are not used solely to pay the premiums for the policy or the costs of the loan;
  • The policy owner or the insured receives a guarantee of a future viatical settlement value of the policy; or
  • The policy owner or the insured agrees to sell the policy or any portion of the death benefit at a future date.

The Committee also expressed concerned with premium finance loans secured only by the market value of the policy—i.e., “non-recourse” loans—as a potential source of investor-initiated policies. Although the amendments are not entirely clear on this point, it appears that a non-recourse premium finance loan would not constitute a “viatical settlement contract,” so long as none of the conditions listed above are present. Thus, nothing in the amendments appears to prohibit a policy owner from obtaining a non-recourse loan at any time. The five year prohibition on settlements, however, would prevent the policy owner from settling the policy within five years of issuance to pay off a non-recourse loan.  This restriction could reduce the attractiveness of non-recourse premium financing arrangements.

The approved amendments exempt certain transactions from the definition of a “viatical settlement contract.” Exempted transactions include, among other things:

  • A policy loan or accelerated death benefit made by the insurer; or
  • A loan based solely on the cash surrender value of the policy made by a licensed lender where the lender takes collateral assignment of the policy, or
  • Any further assignment of the policy by the lender in case of default.

These, and other exempted transactions, are not subject to the five-year prohibition on settlements.

The amendments also permit settlement of a policy at any time under the following circumstances: terminal or chronic illness of the policy owner or insured, disability of the policy owner, death of the policy owner’s spouse, the policy owner’s divorce of his or her spouse, or bankruptcy of the policy owner. In addition, the prohibition against settlements is shortened to two years in the case of financed policies that meet all of the following conditions prior to issuance and for at least two years following issuance:

“(a) Policy premiums have been funded exclusively with unencumbered assets, including an interest in the life insurance policy being financed only to the extent of its net cash surrender value, provided by, or fully recourse liability incurred by, the insured or [certain persons with an insurable interest in the insured’s life];

“(b) There is no agreement or understanding with any other person to guarantee any such liability or to purchase, or stand ready to purchase, the policy, including through an assumption or forgiveness of the loan; and

“(c) Neither the insured nor the policy has been evaluated for settlement.”

The language of this provision is somewhat tangled and may need to be clarified by the Committee, especially the reference to “fully recourse liability.”

At the December 10 Committee meeting, interested parties, including the American Bankers Insurance Association, raised concern that federal law may preempt the approved amendments insofar as they restrict the ability of depository institutions to engage in premium finance. A representative of the Office of the Comptroller of the Currency (“OCC”) who was present at the meeting stated that the OCC was preparing an opinion on this issue. The Committee approved the amendments with the  understanding that it would revisit the preemption issue if necessary after the OCC’s opinion is received.

The approved amendments include a number of other provisions, including:

  • New bonding requirements for viatical settlement providers and viatical settlement brokers;
  • A requirement that viatical settlement brokers disclose to the viator the gross offer for settlement made by any viatical settlement provider and the total compensation that would be paid to the broker;
  • A requirement that viatical settlement brokers disclose to all viators that the broker represents the viator exclusively, and not the insurer or viatical settlement provider;
  • Other new disclosure requirements for viatical settlement brokers and viatical settlement providers, including a requirement that brokers and providers disclose to insurers any transaction, or series of transactions, entered into for the purpose of engaging in viatical settlements during the five-year prohibition period;
  • An expanded rescission period for settlements;
  • A requirement that insurers promptly effect lawful changes in ownership or beneficial interests in a policy;
  • New conflict of interest requirements that prohibit viatical settlement brokers from doing business with affiliated viatical settlement providers and other affiliated entities.