United States: Amended Life Settlements Model Act Unanimously Adopted By NCOIL

After 16 months of debate, the National Conference of Insurance Legislators (NCOIL) has adopted an amended Life Settlements Model Act (Model Act). The Model Act was unanimously adopted during NCOIL's Annual Meeting in November. First adopted in November 2000 and last updated in July 2004, the Model Act "is a targeted attempt to prohibit controversial stranger-originated life insurance (STOLI) transactions while encouraging legitimate life settlements."¹ Although the Model Act and the amended Viatical Settlements Model Act adopted earlier this year by the National Association of Insurance Commissioners (NAIC) have similar objectives, there are several substantive differences between the two model acts.

Among the notable differences, NCOIL has adopted a "first-of-its-kind definition of STOLI,"² which is defined as "a practice or plan to initiate a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the insured."³ The definition goes on to say that "STOLI practices include but are not limited to cases in which life insurance is purchased with resources or guarantees from or through a person, or entity, who, at the time of policy inception, could not lawfully initiate the policy himself or itself, and where, at the time of inception, there is an arrangement or agreement, whether verbal or written, to directly or indirectly transfer the ownership of the policy and/or the policy benefits to a third party."⁴

Another distinguishing point between the two models is the length of time a policyholder is prohibited from settling a policy. The NCOIL Model Act has a two-year moratorium on settlement, which parallels the contestability period traditionally used in life insurance contracts, whereas the NAIC model has a five-year moratorium with certain exceptions for life-changing events.

Recognizing that some commentators have criticized the five-year ban in the NAIC model as addressing STOLI at the back-end, North Dakota State Representative George Keiser, NCOIL's Life Settlements Subcommittee chairman, said, "STOLI occurs at the front-end of a life insurance sale. By defining STOLI, and strengthening reporting requirements and penalties for participating in STOLI, the NCOIL model gets at the heart of what needs to change."⁵ Despite the amendments to the Model Act, "[NCOIL] attempted to protect all of the legitimate applications of financing, trusts, and the structural options that exist in packaging products sold, both from the life settlements perspective, and from the life insurance industry," said Mr. Keiser^.6

The Model Act also includes:(1) a recommendation that states amend their insurable interest laws, if necessary, to prevent the use of trusts to benefit investors without insurable interest; (2) an annual statement requirement for contracts settled within five years of policy issuance; and (3) a penalties section addressing fraudulent life settlement acts.

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