How new law affects life settlements in New York

July 2010

The life settlement market has been a focus of attention in the life insurance industry over the last several years.  A "life settlement" generally occurs when the owner of a life insurance policy sells the policy to a third party in exchange for a lump sum payment – the life insurance policy typically remains in force and the death benefit is paid to the beneficiary named by the new third-party owner.  These types of arrangements, commonly known as "Stranger Owned Life Insurance" or STOLI transactions, have raised many issues, including, but not limited to, insurable interest, proper disclosure and privacy.  In order to address these concerns, the New York Legislature passed the Life Settlements Act, which became effective May 18, 2010 (A few of the Act's provisions became effective immediately upon passage on November 19, 2009, but the majority of the law did not become effective until 180 days after it was enacted.).


The New York Life Settlements Act repealed existing Article 78 of the Insurance Law, which had governed viatical settlements (a viatical settlement involves the sale of a life insurance policy where the insured has a life-threatening illness or condition and wants to have the proceeds of the sale of the life insurance policy during his or her lifetime), and added a new Article 78 covering life settlements (In addition to enacting a new Article 78 of the New York Insurance Law, the legislation also amended various other sections of the New York Insurance Law in order to incorporate life settlement providers, life settlement brokers and life settlement intermediaries into other relevant provisions of the law.).  This new law defines a "life settlement contract" as "an agreement establishing the terms under which compensation is provided to an owner, which compensation is less than the expected death benefit of the policy, in return for the assignment, transfer, sale, release, devise or bequest of any portion of the death benefit, the ownership of the policy or the beneficial interest in the policy or in a trust or any other entity that owns the policy where the primary purpose of the transaction is to acquire the policy."  The law exempts a number of transactions involving the assignment, exchange, transfer or purchase of a life insurance policy from the definition of a "life settlement contract."  For example, a "life settlement contract" does not include assignments of policies as collateral for certain types of loans; exchanges of life insurance policies under Section 1035 of the Internal Revenue Code of 1986, as amended; or certain employer/employee agreements concerning the purchase of life insurance by the employer.


Additionally, the new Article 78 of the New York Insurance Law sets forth licensing requirements for life settlement providers and life settlement brokers as well as registration requirements for life settlement intermediaries.  Pursuant to the new law, the Superintendent of the New York Insurance Department can examine or investigate the operations of life settlement licensees, registrants or applicants.  Also, the new statute states that life settlement providers must obtain the prior approval of the department regarding all life settlement contract forms, and it contains certain privacy provisions in order to protect the identity of the insured and owner of a life-settled policy.  In addition, the new law sets forth specific information that must be disclosed to the insured and owner of a life-settled policy by either the life settlement provider or the life settlement broker.  Moreover, the new law states that life settlement providers can only transfer life-settled policies to certain types of entities, and it also contains a specific provision addressing insurable interest and other concerns related to STOLI transactions.


The department has posted a draft regulation on its website providing further guidance on the new Life Settlements Act, including the types of provisions that must be included in a life settlement contract form and the form of disclosure that has to be provided under a life settlement transaction.  Additionally, the department's website contains model disclosure forms, filing guidance for life settlement contract forms, and information to assist potential life settlement providers in the licensing application process.


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