Understanding whether and how life settlement regulations apply to your policy varies by state as does the nature and substance of those regulations.
Here are Five Fast Facts:
- 43 states have passed full life settlement regulations.
- 2 states have passed regulations covering viatical settlements only.
- There are important differences across states with regulated life settlements, however, when regulations do exist the level of protection for those considering a sale is generally high.
- Minimum waiting periods apply before a policyholder can sell a policy.
- Disclosure requirements that insurance carriers are subject to vary state-by-state.
A life settlement transaction always results in a better outcome for a policyholder than surrendering or lapsing his or her policy. That’s why life insurance carriers won’t tell their policyholders that they have the option of selling their policies to a life settlement investor rather than surrendering or lapsing the policy unless they are required to do so under state law.
Currently, only a fraction of states requires carriers to inform their policyholders about the option they have of selling their life insurance policies for more than the cash value they would get from the carriers once they surrender their policies. State regulations on disclosure requirements vary but in general, here’s how it works:
States Where Limited Life Settlement Disclosure Is Required
States Where Life Settlement Disclosure Is Required
- New Hampshire
- Rhode Island
Disclosure requirements applicable to carriers are only a minor part of the regulations that cover life settlement transactions. Here are the others:
This requirement concerns the minimum period a policyholder is supposed to keep his or her life insurance policy before he or she can sell it in a life settlement transaction. While most people believe the minimum holding or waiting period is the same as the contestability period, that’s not always correct: thirty of the regulated states (out of 45) have statutorily mandated a 2-year minimum holding period. However, currently, Minnesota requires a minimum waiting period of 4 years while the other eleven states require a minimum waiting period of as much as 5 years from the initial purchase/issuance.
State regulations often foresee waivers to the minimum holding period requirement, in certain circumstances that vary depending on the state. The minimum holding period requirement is often waived in case the insured/owner is terminally ill, in case of divorce, to finance retirement, to finance long-term care, etc.
Most of the states have passed regulations on life settlements (forty-five states in total), generally following very closely with the National Conference of Insurance Legislators (NCOIL) Life Settlement.
Model Act (twenty states), or a hybrid between this model and the National Association of Insurance Commissioners (NAIC) Viatical Settlements Model (twelve states), or some variation of the two (thirteen states). As you can see, it’s a mixed bag.
Among the forty-five states with life settlement regulations, Michigan and New Mexico only regulate viatical settlements, therefore only life settlement transactions involving the sale and purchase of a life insurance policy written on the life of a terminally ill individual with a certified life expectancy of fewer than two years is covered.
In the remaining 5 states, i.e., Alabama, Missouri, South Carolina, South Dakota, and Wyoming, life settlement transactions and viatical transactions are unregulated.