Life Insurance Finance Association Will Not Support NAIC Viatical Law.

LIFA Believes Model Act is Harmful to Consumer Rights; Calls on NAIC to Withdraw and Re-draft Act

SAN ANTONIO -- The Life Insurance Finance Association (LIFA) today issued the following statement regarding the NAIC Viatical Settlements Model Act:

The Life Insurance Annuities (A) Committee of the National Association of Insurance Commissioners (NAIC) missed the mark this weekend when it voted out of committee a draft of amendments to the NAIC Viatical Settlements Model Act (the "Model Act"), which are harmful to consumer rights and do little to prevent the abuses which they were purportedly drafted to address.

The original intention of the committee and its chairman, North Dakota insurance commissioner Jim Poolman, was to prohibit the sale of Stranger-Initiated Life Insurance (SILI), also referred to as Stranger-Owned Life Insurance (STOLI). SILI and STOLI-type transactions have raised serious concerns throughout the insurance industry in that they are often designed to manufacture life-insurance sales for the sole purpose of placing that insurance and its death benefits in the hands of disinterested third-party investors, in violation of most, if not all, insurable-interest laws throughout the country.

The Life Insurance Finance Association (LIFA) has supported the efforts of the committee and commissioner Poolman to the extent that they seek to eliminate such abusive transactions. But, while LIFA believes premium-finance lenders must be subject to reasonable regulation, it also advocates strongly for the protection of consumer rights, and the amendments voted on by the committee do not adequately consider those essential rights.

While there are a number of troublesome provisions in the proposed Model Act, the most blatantly offensive to consumer rights is the provision which prohibits the sale of a life-insurance policy in the secondary market for five years from the date of its issuance. The committee, ignoring testimony from consumer advocates, banking and premium finance professionals, has been misled into believing that by extending the current two-year ban on sales, somehow the abusive transactions represented by the SILI and STOLI deals will be undermined and eliminated. LIFA, whose point of view was echoed by legal experts and economists, believes that the five-year prohibition will do nothing to prevent abusive practices, but will have the detrimental effect of preventing certain consumers from selling their life-insurance policies and their personal property, even in the event of severe financial distress. A consumer that sought a certain type of premium financing will find himself or herself forced to lapse the policy or retire it for its minimal cash surrender value if he or she is unable to pay the premiums prior to the five year date. He or she will be prohibited from realizing its market value in the secondary market. This is antithetical to consumer protection, and at the same time fails to accomplish its intended purpose.

LIFA advised the committee at the hearing that the SILI and STOLI marketers, having closely followed the committee's proposed changes, have already adapted their practices such that these amendments will have no impact on their improper transactions. Since the marketers are prohibited from selling the policies, they have designed transactions that transfer ownership of trusts that hold policies, rather than the policies themselves. Not even a twenty-year ban on life-settlement sales would prevent these transactions. Further, the proposed amendments contain many drafting inconsistencies and, as presented, violate the National Bank and Gramm-Leach-Bliley Acts. Therefore, the law would be the subject of litigation if enacted and be struck down for vagueness and conflict with federal laws after adoption by any state.

LIFA and others, including a former insurance commissioner, are urging the commissioners to hold the Model Act until a full-day drafting session can be utilized to fix its numerous legal and technical problems. The group also seeks testimony from consumers and those professionals involved in estate and financial planning to determine the real-world impact of this Model Act before voting to restrict the property rights of American citizens.

LIFA Will Not Support NAIC Model Act

LIFA and its members continue to support the commissioner's work, but the work is not complete. The original NAIC Viatical Settlements Model Act was the subject of years of deliberation in order to capture the activities of the market at that time. This amended Model Act was the subject of only a few months' deliberations. Many critical issues remain unresolved. Therefore, LIFA will not support this legislation in any state and calls upon the NAIC leadership to delay any vote on this Model Act until additional review is undertaken by the Office of Comptroller of the Currency (OCC) and industry professionals.

LIFA also urges its life-insurance colleagues in the other trade associations and those that they represent to review the issues in connection with the movement of the ownership of a trust. Such programs may place undue financial hardships on insurance producers, while putting their license at risk. In addition, the Model Act, as it currently stands, will have the unintended impact of including the insured in a scheme such that they may unknowingly be aiding and abetting a fraud on the insurer. LIFA strongly believes this Model Act will actually embolden those that create these SILI programs by allowing a loophole to legalize the now illegal activity by sidestepping the issue of insurable interest. LIFA members promote the transparency of their methods and products to the insurance industry and are opposed to the SILI programs designed at circumventing the impact NAIC Model Act and state laws while hiding the true nature of these transactions from insurance carriers that issue SILI policies without accurate information.

For more information regarding LIFA's position on these issues, contact Scott Cipinko at 678/858-4001 or [e-mail].

The Life Insurance Finance Association is a nonprofit, professional trade association and its members are comprised of individuals and companies involved in the life insurance premium finance industry. LIFA was founded to provide an open dialogue between and among life insurers, premium finance lenders, life insurance agents, brokers and insurance regulators, to provide consumer advocacy, and to foster a better understanding among participants in the life insurance and premium finance marketplace, state and federal policy makers, and the general public. For additional information, visit www.lifaorg.org.