California Enacts STOLI Legislation
This updates our September 15, 2008 blog post. On October 11, 2009, California Governor Arnold Schwarzenegger signed S.B. 98 (the “Act”), which targets stranger originated life insurance (“STOLI”) transactions. The Act repeals previous laws regarding viatical settlements, which only applied to life insurance policies belonging to individuals with terminal diseases, and broadens the regulation to life settlements, which applies to all life insurance policies. The Act requires any person brokering or soliciting life settlements to be licensed by the California Department of Insurance. Licensees are required to make several disclosures before entering into a contract with the owner of the policy including:
- That there are possible alternatives to life settlements, including, but not limited to, accelerated benefits options that may be offered by the life insurer.
- The fact that some or all of the proceeds of a life settlement may be taxable and that assistance should be sought from a professional tax adviser.
- That the proceeds from a life settlement could be subject to the claims of creditors.
- That a change in ownership of the settled policy could limit the insured’s ability to purchase insurance in the future on the insured’s life because there is a limit to how much coverage insurers will issue on one life.
- That the owner has a right to rescind a life settlement contract within 30 days of the date it is executed by all parties and the owner has received all required disclosures, or 15 days from receipt by the owner of the proceeds of the settlement, whichever is sooner. Rescission, if exercised by the owner, is effective only if both notice of rescission is given and the owner repays all proceeds and any premiums, loans, and loan interest paid on account of the provider within the rescission period. If the insured dies during the rescission period, the contract shall be deemed to have been rescinded subject to repayment by the owner or the owner’s estate of all proceeds and any premiums, loans, and loan interest to the provider.
- Any affiliations or contractual relations between the provider and the broker, and the affiliation, if any, between the provider and the issuer of the policy to be settled.
- That a broker represents exclusively the owner, and not the insurer or the provider or any other person, and owes a fiduciary duty to the owner, including a duty to act according to the owner’s instructions and in the best interest of the owner.
The Act also imposes a two-year ban on life settlements, establishes a statutory definition of STOLI and classifies such transactions as fraudulent acts. Licensed providers will be required to file annual statements that include the total number, aggregate face amount, and life settlement proceeds of policies settled during the immediately preceding calendar year, together with a breakdown of the information by policy issue year, and the names of the insurance companies whose policies have been settled and the brokers that have settled those policies.
The Act was primarily based on the NCOIL Model Act and takes effect July 1, 2010.
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