New York's state Legislature has passed a bill that would to regulate life settlements, requiring brokers and intermediaries to get their insurance licenses.
The bill, which passed the Assembly yesterday after earlier action by the Senate, would not only place life settlement providers and brokers under the state Insurance Department's purview, but also would prohibit stranger-originated life insurance practices. Such practices involve soliciting a person to buy an insurance policy for the express purpose of selling it to outside investors.
“We're happy New York state is joining the ranks of states that are regulated with laws based on the National Conference of Insurance Legislators' model,” said Doug Head, executive director of the Life Insurance Settlement Association.
That life settlements model allows policyholders to sell their policies two years after issuance, while the National Association of Insurance Commissioners' model act requires policyholders to keep their policies for at least five years before selling them.
The New York bill, which now awaits Gov. David Paterson's signature, also requires compensation disclosure for life settlement brokers. Brokers would be prohibited from receiving compensation for reviewing a life settlement contract or for giving advice — unless the payment is based on a written memo that's signed by the party being charged and that specifies the extent of the payment.
The bill also bans excessive pay by barring settlement brokers from receiving compensation from providers if the brokers have already received payment from the owner of a contract. Policyholders would not be allowed to sell their policies until at least two years after they had been issued.
Mr. Head was not pleased by several of the compensation-related requirements in the bill. He's also concerned by the penalties set up in the legislation. Violators could be prosecuted under state insurance laws and face felony charges if they wrongfully attempt to obtain property that's worth more than $25,000.
“The penalties are extraordinary; you have some draconian consequences,” said Mr. Head. "Those kinds of issues continue to trouble us. They're punitive and designed to slow down the settlements industry or to scare people, but we have every confidence that our members are doing business properly,” he added
