Life Settlements Flashcards
Term
Accredited investor - an investor whose net worth is in excess of $1 Million, or a corporation with assets in excess of $5 Million
Capital - money or other financial assets to operate a business
Disclosure - information revealed so someone can make an intelligent and educated decision
Finder’s fee - a commission paid to someone who connects a buyer and a seller (an intermediary’s fee)
HIPAA - Health Insurance Portability and Accountability Act: protects individual’s health information and sets standards for privacy and security of that
information
Material information - information that may alter either party’s decisions regarding a contract
Nonconforming contract - a contract that does not follow state guidelines and provisions
Rescission - an action that takes back, cancels, or nullifies
A. Definitions
A. Definitions
The term life settlement refers to any financial transaction in which the owner of a life insurance policy sells a life insurance policy to a
third party for some form of compensation, usually cash. A life settlement would require an absolute assignment of all rights to the
policy from the original policyowner to the new policyowner.
Policyowners may choose to sell their policies because they feel they no longer need their coverage, or the premium costs have
grown too high to justify continuation of the policy. In many cases, however, life settlement transactions are offered to senior citizens
who may have a life-threatening illness and a short life expectancy. In these situations, the owner may elect to sell the policy to a life
settlement provider for an amount greater than what they would receive if they surrendered the policy for cash value.
Example:
A person, age 70, owns a $1,000,000 life insurance policy. He recently sold his business for $5,000,000 and decided he no longer
needed the insurance coverage. The cash value is $390,000, which the insurance company would give the policyowner if he cashed
in the policy. A life settlement provider may offer him, after reviewing his medical records, $575,000 for the policy. Once ownership is
transferred and the policyowner has received the funds, the life settlement company will assume premium payments until the insured
dies, at which time the life settlement company will receive the proceeds of the policy - $1,000,000.
Know This! In a life settlement, the owner sells an existing life policy to a third party.
Business of Life Settlement
Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life
settlement brokers represent only the policyowners, and have a fiduciary duty to the owners to act according to their instructions and
in their best interest.
This does not include a licensed life settlement provider or its representative, an attorney, an accountant, or a financial planner. This
category includes persons who would not receive a commission upon completion of a life settlement contract, but charge a fee for
their services, whether or not ownership of the policy is transferred.
Financing Transaction takes place when a licensed settlement provider obtains funds from the financing entity. Financing Entity
includes any accredited investor who provides funds for the purchase of one or more life settlement contracts and who has an
agreement in writing to do so.
B. Broker License Requirements
B. Broker License Requirements
Before a person can act as a life settlement broker in this state, he or she must be properly licensed. The following are the required
qualifications for a licensee:
• Be at least 18 years old;
• Submit an application to the Superintendent on the approved form;
• Be determined competent and trustworthy by the Superintendent;
• Complete required prelicensing education;
• Pass the licensing exam;
• Pay any required fees; and
• Submit fingerprints.
If a firm or association is applying for a broker’s license, they must name and authorize natural persons to act individually as life
settlement brokers for the firm.
If a firm or association is applying for a broker’s license, they must name and authorize natural persons to act individually as life
settlement brokers for the firm.
If a life producer has maintained an active license for one year, the prelicensing class and exam, as well as fingerprinting, may be
waived when applying for a life settlement broker license. The Superintendent may refuse to issue a life settlement broker’s license if
the applicant is deemed not trustworthy or has failed to comply with any licensing requirements.
If a life settlement broker’s license is active, but has been lost or destroyed, the Superintendent may issue a replacement license.
Prior to that, however, the broker must file a written application for such license, affirming under penalty of perjury that the original
license has been lost or destroyed. A $15 fee will also be required.
C. Advertising
C. Advertising
A licensed life settlement provider, intermediary, or broker may advertise, but must comply with all advertising and marketing laws,
rules, and regulations set forth by the Superintendent. Advertisements must be truthful, accurate and not be misleading in any way.
D. Privacy
D. Privacy
Life settlement brokers, intermediaries, and providers may not share information regarding the insured’s identity, or financial or
medical information, except as necessary to conduct the business of the transaction, unless permitted or required by law. All parties
to the transaction must comply with privacy protections required by federal law. Should the laws of the state provide for greater
confidentiality than public health law requires, the regulations of the state will govern.
Under the Privacy Rule for HIPAA (Health Insurance Portability and Accountability Act), protected information includes all
“individually identifiable health information” held or transmitted by a covered entity or its business associate, in any form or media,
whether electronic, paper or oral. This is called protected health information (PHI).
Individually identifiable health information including demographic data that relates to past, present or future physical or mental health
or condition, or payment information that could easily identify the individual.
A covered entity must obtain the individual’s written authorization to disclose information that is not for treatment, payment, or
health care operations.
E. Prohibited Practices
E. Prohibited Practices
The following are considered prohibited practices in the business of life settlements:
• Entering into a life settlement contract if the person is aware of any deception;
• Engaging in any transaction while knowing the intent was to avoid disclosure of material information relating to life settlements;
• Engaging in any fraudulent acts in connection with any life settlement;
Entering into a premium finance loan arrangement where any consideration is paid other than normal commissions, or fees
charged other than normal loan fees;
Acting as a life settlement broker or intermediary while having an interest in that policy;
• Receiving any compensation for acting as a life settlement broker or intermediary without being properly licensed;
• Transferring the ownership of a policy that is subject to a premium finance arrangement and not remitting any proceeds or
consideration paid (other than normal commissions or loan fees) to the original owner;
• Paying finder’s fees or any other compensation to any owner’s physician, attorney, accountant, insurance producer or consultant,
or other person acting in these capacities;
Paying life settlement broker’s fees before they have been fully disclosed; and
• Paying life settlement payments in installments.
- Commission Sharing
- Commission Sharing
Persons are prohibited from receiving any compensation for acting as a life settlement broker, or sharing any compensation with a
person who is not licensed as such in this state. No finder’s fees or referral fees may be paid, directly or indirectly, to any owner’s
physician, attorney, accountant, insurance producer, or insurance consultant.
F. Stranger-Originated Life Insurance
F. Stranger-Originated Life Insurance
Stranger-originated life insurance (STOLI) is a life insurance arrangement in which a person with no relationship to the insured (a
“stranger”) purchases a life policy on the insured’s life with the intent of selling the policy to an investor and profiting financially when
the insured dies. In other words, STOLs are financed and purchased solely with the intent of selling them for life settlements.
STOLs violate the principle of insurable interest, which is in place to ensure that a person purchasing a life insurance policy is actually
interested in the longevity rather than the death of the insured. Because of this, insurers take an aggressive legal stance against
policies they suspect are involved in STOL transactions.
Note that lawful life settlement contracts do not constitute STOLs. Life settlement transactions result from existing life insurance
policies; STOLs are initiated for the purpose of obtaining a policy that would benefit a person who has no insurable interest in the life
of the insured at the time of policy origination.
The state of New York does not allow direct or indirect participation in STOLIs.
Trust-owned policies: It is also illegal to use a trust, directly or indirectly, to provide funds for a STOLI transaction in a manner that
violates insurable interest laws of this state.
