“You Have the Right to Shop Around . . .” These seemingly banal words in the right context can be very powerful, as evidenced by the legislation enacted by the states of Maine, Oregon and Washington. Each of these states recently has revised its life settlement statute to ensure that life insurance policy owners are advised of their full range of options when they are deciding what to do with an unneeded or unwanted life insurance policy.
A life settlement is the sale of a life insurance policy for a lump sum greater than its cash value (if it has any) but less than its face value. Life settlements are not appropriate for every policy owner, but for some it provides an ideal means of realizing value from an otherwise illiquid asset. Historically, policy owners who found themselves with a policy that they no longer wanted or needed had only one option – to surrender the policy to the issuing carrier for whatever cash value it possessed. The creation of the secondary market for life insurance has given consumers another option – the ability to sell their unneeded policies for market value.
The secondary market for life insurance has existed in its present form for approximately two decades, but survey after survey has shown that only a small percentage of life insurance agents, and an even smaller percentage of the life insurance owning public, are aware of the life settlement option.
With the enactment of their revised statutes, the states of Maine, Oregon and Washington have ensured that policy owners resident in each of those states will be aware of and encouraged to consult with their financial and legal advisors about whether a life settlement is the right solution for them.
Specifically, in each state’s life settlement law, it is now mandated that in instances where the policy owner is 60 years of age or older or, in Washington and Maine if the policy owner is known by the insurer to be terminally or chronically ill, the insurer must give the policy owner a brochure or document that advises consumers “Life insurance is a critical part of a broader financial plan. There are many options available, and you have the right to shop around and seek advice from different financial advisers in order to find the option best suited to your needs.” 24-A M.R.S. §6808-A, sub- §4; Oregon S.B. 973 §22 (effective January 1, 2010); Washington SSB 5195 §13 (effective July 26, 2009). Further, all three states’ laws require that the notice advise consumers of alternatives to the lapse of the policy, and provide the definition of common settlement industry terms. Additionally, these statutes state that the document or brochure “may include brief descriptions of common products available from providers, [which] must be discussed in general terms for informative purposes only and not identifiable to any specific” licensee or provider.
Insurers are required to give these disclosures in three specific circumstances:
- When the policy owner has requested the surrender of the policy in whole or in part;
- The policy owner has requested an accelerated death benefit; or
- The insurer sends an initial notice that the policy may lapse.
Informing consumers of their rights is only the first step, but it is the most critical. If policy owners know that they have options, they can seek out the necessary expertise to assist them in making the decision that is the best one for each individual’s life insurance needs.
James W. Maxson is Of Counsel in the firm’s Insurance and Reinsurance Practice and co-chair’s the firm’s Life Settlement Practice. Mr. Maxson concentrates his practice in corporate and regulatory matters for the life settlement industry, as well as focusing on mergers and acquisitions and securities transactions. Jim received his bachelor’s degree from Denison University and law degree from the Ohio State University School of Law.