New Mass. Law Restricts Life Insurance Settlement Contracts, Bars STOLI Policies
January 17, 2013 by Thomas Harman
BOSTON, Mass. – Massachusetts Gov. Deval Patrick signed legislation, H 4296, placing new restrictions on life insurance settlement contracts and prohibiting the use of stranger-originated life insurance policies that have been a source of fraud.
This makes Massachusetts the 42nd state to regulate life settlements. The new law is based on the Life Settlements Model Act developed by the National Conference of Insurance Legislators, versions of which have been passed by more than 20 states since 2007. Majority Leader Ronald Mariano was one of the main sponsors of the bill and his chief of staff, Coleen Elstermeyer, said Mariano has been attempting to get a version passed for several years.
The bill was backed by two major life insurance groups, the Life Insurance Settlement Association and the Life Insurance Association of Massachusetts. A fact sheet from Mariano’s office said the new life settlement law would provide consumer protections and uniform business practices in this specific secondary life insurance market.
Life settlement policies result from sales of existing life insurance policies by policyholders to third parties for an average of three to five times the value of policies that would either lapse or be surrendered to the insurer at cash value. The bill would establish licensing requirements for life settlement brokers and providers; create uniform requirements for life settlement transactions; mandate that policyowners receive distinct consumer disclosures before opting for life settlement transactions; and enact anti-fraud measures.
Dennis Herchel, assistant vice president and counsel with MassMutual Life Insurance’s law division, said prior law had dealt only with viatical settlements, in which a policyholder disposed policies when nearing death. But the market developed for policies that otherwise healthy people wanted to unload into the life settlement market.
The new law also makes stranger-originated life insurance policies illegal. STOLIs occur when third-party promoters manufacture life settlements by using cash incentives to induce senior citizens to purchase life insurance policies owned or controlled by third-party investors, with the intent of transferring death benefits to speculators at a later date. The new bill also helps detect, prevent and enforce against STOLI activities. Among the featured items is a prohibition on transfer of policy ownership both before the policy is issued and up to two years afterward, putting it in line with the contestable period for life insurance policies. Other portions of the new law prohibit trusts and premium financing arrangements from being used to act STOLI transactions; and prohibit marketing, advertising or solicitation of a new policy with the intent of selling it. Insurers will be provided with tools that detect and block STOLI transactions.
Herchel said the move to outlaw STOLI and take steps to prevent it in the future is a positive for the industry, saying such practices undermine business and negatively impact pricing. “We’re a life insurance company,” Herchel said. “We want to preserve that business. We think it’s a good business and we’ve worked hard to provide quality products … We view STOLI as a threat to that business.” Despite the law prohibition of STOLI, Herchel said the preventative measures must be in the bill, because of concerns that “we always harbor a concern that people can be creative. It’s just going to be an ongoing issue for the industry to try and battle to preserve the quality of business.”
Massachusetts is not the only state to restrict life settlements and STOLIs in recent years. In 2010, New Hampshire passed a law that drew fire from the Life Insurance Settlement Association for being too restrictive on life settlements. The law also put a five-year moratorium on STOLI policy settlements (Best’s News Service, June 21, 2010).
(By Thomas Harman, associate editor, BestWeek)
