A new New York law seeks to protect consumers by regulating "life settlements," in which the elderly sell their life insurance for far more than the value upon cancellation to get cash, often to stave off hard times.
"It's a billion dollar unregulated market," said Sen. Neil Breslin, an Albany County Democrat who sponsored the bill. "This legislation contains numerous disclosure and consumer protection provisions which will help to ensure that an owner considering selling his or her policy makes an informed decision."
Sen. Eric Schneiderman, a Manhattan Democrat, said fraud and abuse are rampant in the system, a view disputed by the industry.
"We think we offer a tremendous option to consumers," said Doug Head, executive director of the Life Insurance Settlement Association based in Florida, which supports regulation. He said a policy holder, usually in their 70s or older, can get 15 percent to 20 percent of the final death penalty of their policy. That's three to four times more than the insurance company would pay, and many consumers simply let their policies expire to avoid paying more premiums, he said.
Head said 39 states now regulate the industry and, with the addition of New York, 80 percent of the U.S. population is protected by state laws.
The law will force health records associated with policies to remain confidential and will license operators, similar to what the state already does for other insurance-related companies. The new law also prohibits an offshoot from the life settlement industry in recent years, called stranger-originated life insurance. Under a so-called STOLI, life settlement companies and investors target individuals, often senior citizens, and get them to buy life insurance policies with large payoffs upon death for the sole purpose of selling the policies to a company.
Head noted STOLI sales are done by life insurance companies because they are the only agents licensed to originate an insurance policy. Life settlement companies are the secondary market, selling and reselling policies written by insurance companies.
The life settlement industry began in the late 1970s, when AIDS patients sought to sell their life insurance policies for cash to pay for treatment, experimental drugs, and for routine bills when they lost their jobs. In recent years, the industry has focused on older people without life-threatening diseases, but who no longer need or want life insurance or who need to cash in the policies for a fraction of the death benefit.
The policies are then resold, with the ultimate holder of the policy receiving the death benefit when the original policy holder dies.
Head said he has a concern over some issues in the law, strongly supported by insurance companies. For example, the measure creates a misdemeanor of life settlement fraud punishable by up to a year in jail, when Head believes some of the same acts committed by licensed life insurance agents don't carry a criminal charge.
"The imbalance is extreme," he said.