Chapter 4
Market Regulation


The important points addressed in this lesson are:

Types of ethical abuses that have affected the industry
Terms applied to various unethical practices
Level of government regulation applicable to the industry
The NAIC's Viatical Settlement Model Act
Role of industry trade associations in regulating the industry

Uses and Abuses

Predictably, scam operators have come to view this young industry as a lucrative arena for fraud.  Some operators use shady practices to defraud investors who purchase life policies, while others perpetrate fraud against those attempting to sell their policies.  Sometimes the scams are complex, other times the abuses are simple cases of misrepresentations and outright embezzlement.  

When viatical settlements were first introduced, the contract and settlement process were more flexible than they are currently.  In some cases the viator would assign the policy to the purchaser, and the purchaser would fail to pay the proceeds.  This type of abuse has been eliminated by the use of an escrow agent.  Nowadays, the settlement process is handled by an independent party to assure the purchaser receives a properly assigned policy and the seller receives the proceeds.   

From an investor‘s point of view, sometimes viaticated policies lapsed due to non-payment of premiums.  Remember that the purchaser is responsible for future premium payments on viaticated policies.  If those premiums are not paid, the policy lapses and the investor will not receive the death benefits when the contract “matures”.  Often in the case of viatical settlements, the purchaser will place monies on deposit with an escrow agent to cover premium payments for the rest of the insured’s life expectancy.  This deposit, as part of the closing process, minimizes the possibility of a lapsed policy due to non-payment of premiums.

Other abuses aimed at investors are fruadulent or false advertising, such as:

making outrageous promises, such as guaranteeing returns of 40 percent;
characterizing the investment in viatical settlements as risk free; and
implying that the viatical settlement is, in some manner, guaranteed by a life insurer or government entity.

Remember that actual return earned on a lifetime settlement is based on whether the insured's projected life expectancy was correct.  So using terms such as "guaranteed" in advertising is clearly a misrepresentation.  As a result, the North American Securities Administrators Association (NASAA) classified "misrepresented viaticals" among the top 10 investment frauds in the country.

It is not solely in terms of advertising, however, that some of the most egregious violations have occurred -- sometimes the schemes are outright theft..

In the case of SEC v. David W. Laing and PCO, Inc., viatical settlements were advertised to investors as a risk-free way to earn 25 percent per year. In addition to that false advertising, the company accepted $95 million from more than 1,100 investors, but never bought the viaticals, using the funds instead to finance personal airplanes and lavish lifestyles. The owner of the company pled guilty to fraud.

In a somewhat similar case, an indictment was brought against a viatical seller alleging that it invested only $6 million of the $115 million it took from investors. Federal agents raided another viatical settlement company due to an insurance fraud known as clean sheeting.

The fraud and misrepresentation that have plagued the viatical industry have given rise to a new lexicon of terms to describe them. These terms include:

clean sheeting
warehousing
wet paper

Clean sheeting is the deliberate omission of a material fact or the deliberate inclusion of an untrue statement by an applicant during the insurance application process with the intent to commit fraud. It is a material misrepresentation designed by the applicant to obtain a life insurance policy that otherwise would not be underwritten or to obtain a policy at premiums that are lower-than-appropriate for the proposed insured’s level of risk.

A number of regulators have expressed concern over the increased incidence of clean sheeting in the viatical settlements industry. By means of clean sheeting, a terminally ill applicant might viaticate the life insurance policy for a settlement far in excess of the premiums paid.

Another term that has been popularized by fraudulent viatical practices is known as wet paper. Wet paper is a life insurance policy that is still in its contestable period, that is, the ink is still wet on the policy. Wet paper sometimes refers to the purchase of life insurance coverage from a life insurance company with the specific intent of selling the contract to a third party. The National Association of Insurance Commissions (NAIC) has stated that these wet paper sales have been encouraged by some life insurance agents and viatical company representatives in order to profit from the transaction.

Clean sheeting and wet paper also leads to another fraudulent practice known as warehousing. Warehousing is the deliberate putting-aside by a viatical company of a life insurance policy that is known to have been accquired through clean sheeting until the period of contestability expires. Giving the so-called wet ink an opportunity to dry.

Some of these problems are a result of a new market finding the best way to conduct business. Sometimes the solution is as simple as using an escrow agent to safeguard both buyer and seller.  Other times, the industry has developed a degree of self-regulation, and in some cases, state governments have enacted statutes.   By far, most of the abuses in this new market are aimed at purchasers of viaticated policies.  Unsophisticated investors seem most likely to be taken in by fraudulent sales pitches and other deceptive practices -- and perhaps a little bit of their own greed when tempted with very generous possible returns.  As the market has matured, the smaller, individual investors have been replaced with large financial institutions that have the resources to investigate and protect themselves from abusive practices.  In addition, these large companies have imposed stricter standards and market discipline on the evolving marketplace.


Viator and Investor Concerns


When the lifetime settlement is complete, the policyholder gives up ownership and control of the policy to another party.  Viators surrender their surviving family members' ability to collect the death benefit of that policy.  From an investor's perspective, a lifetime settlement is an investment in the timely death of the insured person -- which represents a significant investment risk.  The table below summarizes a number of risks buyers and sellers faces -- and concerns that investors and viators of life insurance policies should be aware of when contemplating a lifetime settlement.  As you can see from this list -- investors contemplating buying a viaticated policy face many more issues than viators.

VIATOR CONCERNS
"the seller"
INVESTOR CONCERNS
"the buyer"
negative financial impact on policyholder and others:
settlement may deny survivors of needed death benefits
unless escrowed properly, viators risk assigning the policy without receiving payment
proceeds may be inadequate to meet viator's needs
receipt of proceeds may cause the viator to lose other "means tested" benefits available from charitable organizations or government programs such as Medicaid, Medicare, Social Security, etc.
Privacy and tracking problems:
many people are involved in the transaction and they may have access to personal information such as medical records
viators should inquire as to who will be privy to personal information
find out the identity of the escrow agent and their relationship, if any, to the settlement provider  
determine who is responsible for tracking the insured's health and whereabouts
examine the adequacy of the tracking process -- the insured may not comply with requests for information or medical exams
the insured may use the proceeds to travel, making efforts to track (or obtain a death certificate) more difficult

Know who is responsible for various actions:
the viator may have to pay off any policy loans before selling the policy
in the case of permanent insurance, what will happen to policy dividends, accidental death benefits, and other riders or benefits attached to the policy?
know the method(s) the settlement provider will use to track the insured
who is responsible for obtaining a copy of the death certificate and the costs associated with that effort
future premiums must be paid to keep the policy in force -- are those costs "escrowed"? if so, for how long? if not, who is responsible for making those payments?
will benefits be paid by the insured directly to the investor as a named beneficiary on the policy, or indirectly through a trust established by the settlement provider
in the investment contract the settlement provider should guarantee prompt payment of the death benefits when the insured dies
be aware of any administrative fees imposed (for tracking insured, escrow accounts, etc.)
Life expectancies are only estimates
viators may outlive the anticipated life expectancy, and proceeds may not last long enough
how is the life expectancy estimate determined?
is the person estimating life expectancy qualified?  independent of the settlement provider?
was life expectancy based on a physical examination of the insured or a review of medical records?  was there a second opinion?
if the insured outlives the life expectancy, the investor's rate of return will be less (sometimes far less) than anticipated
the insured may outlive the investor, which may cause problems in probate or other estate-planning issues
Group life policies are owned by a third party (such as an employer)
viators should determine who will be responsible for converting the group certificate to individual coverage
investment in a group life certificate is not as "safe" as an "individual" policy.  The policyholder (the employer) may change the contract or even drop it in favor of another group policy.
some group policies cap the amount of group certificates that can be converted to individual policies
conversion from group to individual coverage usually results in a higher future premium payments
Not all settlement providers are the same:
offers can vary widely from one provider to another -- viators should shop around
make sure the broker and provider are properly licensed
investors should determine the process of recovering his or her investment if the provider goes out of business
investors should be ready to trace the purchased policy in case the provider goes out of business -- investors should insist on disclosure of the name of the insurance company and policy numbers of any policies they have invested in
investors should evaluate the financial solvency of the settlement provider
make sure the agent and provider are properly licensed
viatical settlement providers may be subject to different state laws and rules (or no laws at all) depending on where they conduct business
The right to the death benefit may be questionable:
the viator's heirs may challenge the assignment
the policy may be under a court-ordered restriction, such as a divorce settlement in which one party is responsible for maintaining the policy while the other party remains as beneficiary.
investor should investigate any possible legal challenges -- competency of the viator, pending lawsuits against the viator
Lack of control:
the investment "matures" upon the death of the insured -- and an unknown date in the future.  There are no provisions for early payment
dependent on the continued existence and financial solvency of the viatical settlement provider to track the investment until maturity
death benefits will be paid only upon filing a valid claim, which includes a death certificate.  Administrative problems in obtaining a death certificate may delay eventual payment.
possible fraud
be aware of the contestability period of any policy invested in -- "wet paper"
be aware that the applicant may have obtained the policy fraudulently -- "cleansheeting"
be aware of circumstances in which the insurer may deny claims after the contestability period -- impersonation, lack of insurable interest, fraud involving the viator and settlement provider
tax consequences
there may be serious tax planning implications, investors should discuss these with their tax advisors
investment in lifetime settlements through a retirement account such as an IRA or 401(k) can create difficulties if the insured does not die before retirement funds are needed or before mandatory distributions must begin (usually age 70½)

Regulators

As mentioned earlier, government regulators tend to react to past problems.  In an effort to curb some of the abuses that have occurred in this new market, many states have enacted regulations governing the viatical industry.  Some states view the industry as providing investment opportunities to the purchasers of viaticated policies.  These states design their rules from a securities point of view and give the state securities regulators jurisdiction over these transactions.    Other states look at the sale of insurance policies as an insurance matter, to be governed in the context of insurance regulations.  To assist those states, the National Association of Insurance Commissioners -- aided by two viatical trade organizations and other insurance industry associations -- drafted a model law in 1994: the Viatical Settlements Model Act.  Some states have adopted that Model Law, others have drafted their own legislation.  To date the federal government has allowed the individual states to regulate the viatical industry.  The only current federal rules on viatical settlements deal with the tax consequences of the sale.    Each state is free to adopt its own legislation.  Currently 35 of the 51 jurisdictions (including the District of Columbia) regulate viatical settlement in some fashion.    


Subject to
Securities Regulators
Subject to
Insurance Regulators
Unregulated
Arizona
Iowa
Maine
North Dakota
South Dakota
Alaska      
Arkansas
California
Connecticut
Delaware
Florida
Indiana
Illinois
Kansas
Kentucky
Louisiana
Massachusetts
Michigan
Minnesota
Mississippi
Montana
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Alabama
Colorado
District of Columbia
Georgia
Hawaii
Idaho
Maryland
Missouri *
Nebraska
Nevada
New Hampshire *
Pennsylvania *
Rhode Island
South Carolina
West Virginia
Wyoming









*  legislation pending


The regulation of lifetime settlements is a "hot" topic among regulators, and state laws are subject to change.  It is important that those involved in arranging lifetime settlements be aware of the regulations that apply in their respective states.


Industry Self-Regulations

The two principal industry organizations are both based in Washington, D.C.: the Viatical and Life Settlement Association of America (VLSAA), and the National Viatical Association (NVA). Both organizations prescribe a code of ethics for their members.  Like other trade and industry associations, these organizations attempt to represent their members in various areas and to promote the interests of their members and the public that the members serve.   The primary difference between the two organizations is their focus:  the NVA is concerned with the proper treatment of viators, the VLSAA approaches viatical transactions from the purchaser’s point of view.  


Viatical and Life Settlement Association of America (VLSAA)

The Viatical and Life Settlement Association of America (VLSAA) was founded in 1995 as a non-profit trade association for members of the viatical and life settlement industry, associated businesses and consumers. It is the largest association in the business. The VLSAA complies fully with all applicable laws, anti-trust laws, federal, state and local laws and all trade regulation and legal requirements.

Since its inception, the VLSAA has been a leader in promoting responsible legislation and regulation of the industry. It has contributed conceptual and detailed language to actual laws governing the industry in most states throughout the United States.

These efforts have resulted in improved public information, public awareness and created a competitive market place for the purpose of serving the consumer a valuable financial service.  

Members of the VLSAA must design an internal anti-fraud policy -- and file a copy of it with the Association.  This plan must address use of viator’s medical information and efforts to review it, how to handle material inconsistancies in the application, coordination with state regulators in fighting fraud, and employee education and training.   VLSAA  members agree to not transact business using “wet paper”, i.e., policies still in their contestability period.   Members must also agree to abide with its Code of Ethics and make various disclosures to purchasers of viaticated policies, including:

annual return is based on the insured‘s life expectancy, which cannot be guaranteed
the identity of the party responsible for payment of future premiums.
possible future premium payments due to improved health or reaching a limiting age under a waiver of premium provision
the identity of the person who evaluated the insured’s life expectancy
in the case of group coverage, possible termination of the group policy by the group owner and possible actions necessary to keep the coverage in force
the contestability of any possible claims by the insurance company under the contestability period, suicide clause, etc.
that investments in viaticated policies are illiquid, and
proper disclosure of company experience in regard to illustrations or example of past performance.



National Viatical Association (NVA)

The National Viatical Association (NVA) is dedicated to the ethical, professional, and compassionate management of pre-death purchase of life insurance policies of a terminally ill individuals.  Realizing the rapid growth of the viatical industry, the National Viatical Association (NVA) was formed in 1993. NVA headquarters is located in Washington, D.C. The association sets the standards for the viatical industry and operates on behalf of its members and the individuals they serve.


Standards of Business Practice

Members of the National Viatical Association pledge to conduct their daily business practices in such a manner as:

To conform to all Federal and State laws and regulations;
To uphold the high standards as outlined in this Association's Code of Ethics;
To hold in the strictest of confidence the viator's medical history or current medical condition;
To encourage the viator to secure the advice and counsel of a financial planner, insurance professional, attorney and/or tax accountant before viaticating any policy;
To inform viators that the viatication of any policy might reduce or completely eliminate some government (Federal or State) entitlement programs that he/she might currently be receiving; therefore, seek advice from the proper governmental agencies;
To inform the viator as to whether or not the underwriting insurance company on the policy he/she wishes to viaticate has an accelerated death benefit program; and, whether he/she qualifies;
To assure the viator that at no time would my company solicit an investor that would be in a position to influence the treatment of the particular viator's illness;
To see that committed funds to a particular policy be placed with an escrow agent immediately upon receipt of the necessary documents to transfer ownership and/or beneficiary designation of the policy;
To see that the committed funds are released to the viator in strict compliance with the applicable contractual agreement upon the receipt from the insurer that the transfer of ownership and beneficiary designation has been accomplished;
To prohibit certain business practices by viatical settlement companies:
     unfair and deceptive acts;
     high pressure sales tactics;
     direct solicitation of viators;
     discrimination in the making of viatical settlement offers;
     collusion in bidding, including communication of any offers made to a particular viator on a particular policy;
To perform our fiduciary responsibilities with respect to our clients so as not to create any adverse transactions.


Code of Ethics

As a member of the National Viatical Association, I pledge to:

    Hold the selling of viatical settlements as a profession in high esteem.
    Keep the needs of my clients always uppermost in all transactions.
    Respect my clients' trust in me and never do anything which would betray that trust or confidence.
    Provide, to the best of my ability, all information to my client which would assist him/her in making a well informed decision.
    Use no advertising which may be false or misleading.
    Conduct my business with such a high degree of professionalism that other's emulating my example would only help to elevate the standards of our vocation.
    Be fair and just to my competitors.
    Engage in no practice which might reflect unfavorably on myself or this industry.



Funding Company Discipline

In the recent past, the life-settlement industry has evolved significantly as institutional funding brought new quality standards, consumer protection, and transactional discipline. Viatical settlement providers with institutional financing have been thoroughly scrutinized and adhere to specific guidelines and underwriting practices. Considering the hundreds of millions of dollars each institution commits to the life settlement industry, only the leading settlement providers will get institutional funding. Institutionally funded companies have gone through meticulous due diligence to get their funding, which sets them worlds apart from life-settlement companies that seek individual investors. Companies that do not have institutional funding should be thoroughly evaluated because they may present consumer and transactional risks not associated with companies that fund policy purchases with institutional funds. Life-settlement companies that only purchase life insurance policies with institutional funds eliminate consumer risks and ensure the transaction's legitimacy. These companies also encourage a more regulated industry.


Appendix:  Viatical Settlements Mondel Act

Table of Contents
Section 1. Short Title
Section 2. Definitions
Section 3. Licensing Requirements
Section 4. Licensing Suspension, Revocation or Refusal to Renew
Section 5. Contract Requirements
Section 6. Examination
Section 7. Disclosure to Owners
Section 8. Disclosures to Purchasers; Misrepresentation
Section 9. General Rules
Section 10. Authority to Promulgate Regulations; Conflict of Laws
Section 11. Prohibited Practices
Section 12. False Representation; Deceptive Words
Section 13. Injunctions; Civil Remedies; Cease and Desist
Section 14. Unfair Trade Practices
Section 15. Effective Date

Section 1. Short Title.

Section 1 thorough 15 of this Act may be cited as the 'Life Settlement Act'.
(DRAFTING NOTE: THE NEW LAW FOR THIS ACT IS PROPOSED TO DEFINE THE RESPONSIBILITY OF THE STATE INSURANCE COMMISSIONER WITH REGARD TO LIFE SETTLEMENTS. REGULATION OF THIS ACT OS APPROPRIATELY THE RESPONSIBILITY OF THE STATE INSURANCE COMMISSIONER. THE GOAL SHOULD BE TO TRACK EXISTING INSURANCE LAWS AS OPPOSED TO CREATING NEW LAWS.)

Section 2. Definitions.

1. 'Advertisement' means written, electronic or printed communication or any communication by means of recorded telephone messages or transmitted on radio, television, the Internet or similar communications media, including film strips, motion pictures and videos, published, disseminated, circulated or placed before the public, directly or indirectly, for the purpose of creating an interest n or inducing a Person to purchase or sell a life insurance policy or an interest in a life insurance policy pursuant to a Sales Contract or a Purchase Agreement.
2. 'Broker' means a person who, on behalf of an Owner and for a fee, commission or other valuable consideration, offers or attempts to negotiate Sales Contracts, between an Owner and one or more Providers, the subject of which is a Life Settlement. A Broker represents only the Owners and owes a fiduciary duty to the Owner to act according to the Owners instructions, notwithstanding the manner in which the Broker is compensated. A Broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the Owner whose compensation is not paid directly or indirectly by the Provider.
3. 'Chronically Ill' means:
a. being unable to perform at least two (2) activities of daily living (i.e., eating, toileting, transferring, bathing, dressing or continence);
b. requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment; or
c. having a level of disability similar to that described in Paragraph (1) as determined by the Secretary of Health and Human Services.
4. 'Commissioner' means the Commissioner or Superintendent of the Department of Insurance.
5. 'Financing Entity' means an underwriter, placement agent, lender, purchaser of securities, purchaser of a policy or certificate from a Provider, credit enhancer, or any entity that has a direct ownership in a policy or certificate that is the subject of a Sales Contract, but:
a. whose principal activity related to the transaction is providing funds to effect the Life Settlement or purchase of one or more policies; and
b. who has an agreement in writing with one or more Providers to finance the acquisition of Sales Contracts.
'Financing Entity' does not include a non-accredited investor or Purchaser.
6. 'Financing Transaction' means a transaction in which a licensed Provider obtains financing from a Financing Entity including, without limitation, any secured or unsecured financing, and securitization transaction, or any securities offering which either is registered or exempt from registration under federal and state securities law.
7. 'Life Settlement' means the sale, assignment, transfer, devise or bequest of the death benefit or any portion of an insurance policy or certificate of insurance for compensation less than the expected death benefit of the insurance policy or certificate. A Life Settlement also includes a loan or other lending transaction secured primarily by an individual or group life insurance policy or death benefit other than a loan by a life insurance company pursuant to the terms of the life insurance contract, or loan secured by the cash value of a policy. It also includes an agreement to transfer ownership or change the beneficiary designation at a later date regardless of the date that compensation is paid to the seller.
8. 'Owner' means the Owner of a life insurance policy or certificate holder under a group policy. The term 'Owner' does not include any Provider or other licensee under this Act.
9. 'Person' means any natural Person or legal entity, including but not limited to, partnerships, associations, trusts or corporations.
10. 'Provider' means a Person, other than an Owner, who enters into of effectuates a Sales Contract with an Owner, the subject of which is a Life Settlement. A Provider does not include:
a. any bank, savings bank, saving and loan association, credit union or other licensed institution which takes an assignment of a life insurance policy or certificate issued pursuant to a group life insurance policy as collateral for a loan;
b. any natural Person who enters into no more than one agreement in a calendar year for the transfer of a life insurance policy or certificate issued pursuant to a group life insurance policy, for compensation or anything of value less than the expected death benefit payable under the policy;
c. a Purchaser;
d. or any authorized or eligible insurer that provides stop loss coverage to a Provider;
e. a Financial Entity;
f. a Special Purpose Entity;
g. a Related Provider Trust;
h. a Broker;
11. 'Purchase Agreement' means a Contract or agreement entered into by a Provider with a Purchaser, to which the Owner is not a party, to purchase a policy or an interest in a life insurance policy, or acquire a beneficial interest, or certificate issued to a group life insurance policy.
12. 'Purchased Policy' means a policy or group certificate that has been acquired by a Provider pursuant to a Sales Contract.
13. 'Purchaser' means a Person who pays compensation or anything of value as consideration for a beneficial interest in a trust which is vested with, or for the assignment, transfer or sale of, an ownership or other interest in a life insurance policy or a certificate issued pursuant to a group life insurance policy which has been or will be the subject of a Sales Contract. A Purchaser does not include a licensee under this part, any Person who is a qualified institutional buyer or accredited investor (as defined, respectively, in Rule 144A or Regulation D, Rule 501, promulgated under the Securities Act of 1933, as amended), a Financing Entity, or a Special Purpose Entity.
14. 'Related Provider Trust' means a titling trust or other trust established by a licensed Provider or a Financing Entity for the sole purpose of holding the ownership or beneficial interest in purchased policies in connection with a Financing Transaction. In order to qualify as a Provider Trust, the trust must have a written agreement with the licensed Provider under which the licensed Provider is responsible available to the Department of Insurance as of those records and files were maintained directly by the licensed Provider.
15. 'Sales Agent' means a Person other than a licensed Provider who arranges the purchase through a Purchase Agreement of a policy or an interest in a life insurance policy or certificate issued pursuant to a group life insurance policy.
16. 'Sales Contract' means a written agreement entered into between a Provider and an Owner, the subject of which is a life Settlement. Sales Contract also includes a written agreement for a loan or other lending transaction, secured primarily by an individual or group life insurance policy, other than a loan by a life insurance company pursuant to the terms of the Sales Contract, or a loan secured by the cash value of a policy.
17. 'Special Purpose Entity' means a corporation, limited liability company, or other similar entity formed solely to provide either directly or indirectly access to institutional capital markets to a Financing Entity or Provider.
18. 'Terminally Ill' means having an illness or sickness that can reasonably be expected to result in death benefit in twenty-four (24) months or less.
19. 'Viatical Settlement' means a Life Settlement wherein the insured is terminally or chronically ill.

Section 3. Licensing Requirements.

1. No Person, wherever located, shall act as a Provider or Broker with an Owner [or multiple owners] or Purchaser who is a resident of this state, without first having obtained a license from the Commissioner.
[Drafting Note: Some states have chosen to regulate as securities. Therefore, in addition to this language, securities laws may apply.]
2. Application for a Provider, Broker, or Sales Agent license shall be made to the Commissioner by the applicant on a form prescribed by the Commissioner, and the application shall be accompanied by a fee of [INSERT AMOUNT] dollars.
3. Licenses may be renewed every [INSERT NUMBER OF YEARS] on the anniversary date upon payment of the annual renewal fee of [INSERT AMOUNT] dollars. Failure to pay the fee within the terms prescribed shall result in the automatic revocation of the license.
4. The applicant shall provide such information as the Commissioner may require on forms prepared by the Commissioner. The Commissioner shall have authority, at any time, to require such applicant to fully disclose the identity of its stockholders, partners, officers and employees, and the Commissioner may, in the exercise of the Commissioner's sole discretion, refuse to issue such a license in the name of any person if satisfied that any officer, employee, stockholder or partner thereof who may materially influence the applicant's conduct meets the standards of Sections 1 to 14 of this Act.
5. A license issued to a partnership, corporation or other entity authorizes all members, officers and designated employees to act as a licensee, if those Persons are named in the application and any supplements to the application.
6. Upon the filing of an application and the payment of the license fee, the Commissioner shall make an investigation of each applicant and may issue a license if the Commissioner finds that the applicant:
a. if a Provider, has provided a detailed plan of operation;
b. is competent and trustworthy and intends to transact its business in good faith;
c. has a good business reputation and has had experience, training or education so as to be qualified in the business for which the license is applied;
d. if the applicant is a corporation, is incorporated pursuant to the laws of this state or is a foreign corporation authorized to transact business in this state; and
e. has provided to the Commissioner or Insurance Department an anti-fraud plan that includes:
1) a description of the procedures for detecting and investigating possible fraudulent acts and producers for resolving material inconsistencies between medical records and insurance applications;
2) a description of the procedures for reporting fraudulent insurance acts to the Commissioner;
3) a description of the plan for anti-fraud education and training of its underwriters and other personnel; and
4) a written description or chart outlining the arrangement of the anti-fraud personnel who are responsible for the investigation and reporting of possible fraudulent insurance acts and investigating unresolved material inconsistencies between medical records and insurance applications.
7. The Commissioner shall not issue any license to any nonresident applicant, unless a written designation of an agent for service of process is filed and maintained with the Commissioner or unless the applicant has filed with the Commissioner the applicant's written irrevocable consent that any action against the applicant may be commenced against the applicant by service of process on the Commissioner.
8. Each licensee shall file with the Commissioner on or before the first day of March of each year an annual statement containing such information as the Commissioner by rule may prescribe.
9. A Provider may not use any Person to perform the functions of a Sales Agent or Broker as defined in this Act unless the Person holds a current, valid license as a Sales Agent or Broker, and as provided in this section.
10. A Sales Agent may not use any Person to perform the functions of a Provider as defined in this Act unless such Person holds a current, valid license as a Provider, and as provided in this section.

Section 4. License Suspension, Revocation or Refusal to Renew.

1. The Commissioner may suspend, revoke or refuse to renew the license of any Licensee if the Commissioner finds that:
a. there was any material misrepresentation in the application for the license;
b. the licensee has been guilty of fraudulent or dishonest practices, is subject to a final administrative action or is otherwise shown to be untrustworthy or incompetent to act as a licensee;
c. the Provider demonstrates a pattern of unreasonable payments to policy Owners;
d. the licensee has been convicted of a felony, or of any misdemeanor of which criminal fraud is an element; or the licensee has pleaded guilty or nolo contendere with respect to any felony or any misdemeanor of which criminal fraud is an element, regardless whether a judgment of conviction has been entered by the court; or
e. the licensee has violated any of the provisions of this Act.
2. Before the Commissioner shall deny a license application or suspend, revoke or refuse to renew the license of any licensee under this Act, the Commissioner shall conduct a hearing in accordance with this state's laws governing administrative hearings.

Section 5. Contract Requirements.

No person may use any form of Sales Contract or Purchase Agreement in this state unless it has been filed with and approved by the Commissioner. Any such form filed with the Commissioner shall be deemed approved if it has not been disapproved within sixty (60) days of the filing. The Commissioner shall disapprove a form if, in the Commissioner's opinion, the Sale Contract form or Purchase Agreement or provisions contained therein are unreasonable, contrary to the interest of the public, or otherwise misleading or unfair to the Owner or Purchaser.

Section 6. Examination.

1. The Commissioner may, when the Commissioner deems it reasonably to protect the interests of the public, examine the business and affairs of any licensee or applicant for a license. The Commissioner may order any licensee or applicant to produce any records, books, files or other information reasonably necessary whether such licensee or applicant is acting or has acted in violation of the law or otherwise contrary to the interest of the public. The expenses incurred in conducting any examination shall be paid by the licensee or applicant.
2. Names of and individual identification data for all Owners and insured shall be considered private and confidential information and shall not be disclosed by the Commissioner unless required by law.
3. Records of all transactions, Sales Contracts and Purchase Agreements, shall be maintained [STATE NUMBER OF YEARS AFTER DEATH OF THE INSURED; 3-5 IS] by the Provider and shall be available to the Commissioner for inspection during reasonable business hours.

Section 7. Disclosures to Owners

1. The Provider shall provide in writing the following information to the Owner no later than the date the Sales Contract is signed by all parties:
a. the fact that possible alternatives to Sales Contracts exist, including, but not limited to, accelerated benefits offered by the issuer of the life insurance policy;
b. the fact that some or all of the proceeds of a Sales Contract may be taxable, and that assistance should be sought from a professional tax advisor;
c. the fact that the proceeds from a Sales Contract could be subject to the claims of creditors;
d. the fact that receipt of proceeds from a Sales Contract may adversely affect the recipients' eligibility for public assistance or other government benefits or entitlements, and that advice should be obtained from the appropriate agencies;
e. the fact that the Owner has a right to rescind a Sales Contract within fifteen (15) days of the date it is executed by all parties and the Owner has received the disclosures contained herein; if the insured dies during the rescission period, the Contract shall be deemed to have been rescinded subject to repayment of all proceeds to the Provider;
f. the fact that proceeds will be sent to the Owner within three (3) business days after the Provider has received the insurer or group administrator's acknowledgement that ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated in accordance with the terms of the Sales Contract;
g. the fact that entering into a Sales contract may cause other rights or benefits, including conversion rights and waiver of premium benefits that may exist under the policy or certificate of a group policy to be forfeited by the Owner and that assistance should be sought from a professional financial advisor;
h. the amount and method of calculating the Broker's compensation, wherein the term compensation includes anything of value paid or given to a Broker for the placement of a policy;
i. the date by which the funds will be available to the Owner and the transmitter of the funds;
j. the fact that the Commissioner shall require delivery of a Buyer's Guide or a similar consumer advisory package to Owners during the solicitation process;
k. the fact that the Commissioner shall require Providers and Brokers to print fraud warnings on their applications and on their Sales Contracts in compliance with the state's insurance fraud warning requirements.
2. The written disclosures required under this Subsection shall be conspicuously displayed in any Sales Contract furnished to the Owner by a Provider.

Section 8. Disclosures to Purchasers, Misrepresentation

A. The Provider and the Sales Agent, themselves or through another Person, shall provide in writing the following disclosures to any Purchaser or prospective Purchaser, no later than the date the Purchase Agreement is signed by all parties:
1. that the life expectancy and rate of return are only estimates and cannot be guaranteed;
2. that the return represented as being available under the Purchase Agreement is directly tied to the projected date of death of one or more insured Persons;
3. if a rate of return is represented, the projected life expectancy of the insured(s) whose life or lives are tied to the return, and that the longer the life of the insured(s), the less the return will be;
4. if required by the terms of the Purchase Agreement, that the Purchaser may be responsible for the payment of insurance premiums or late or surrender fees, or other costs related to the life insurance policy which may reduce the return;
5. the amount of any trust fees, commissions, deductions, or other expenses, if any, to be charged to the Purchaser;
6. the name and address of the Person responsible for tracking the insured(s);
7. the name and address of the Person with the responsibility for paying the premium until the death of the insured;
8. the name and address of the escrow agent and its relation, if any, to the Provider, trust, Broker or Sales Agent;
9. that group policies may contain limitation on conversion rights and that additional premiums may have to be paid if the policy is converted;
10. that the purchase of a Sales Contract should not be considered a liquid purchase, since it is impossible to predict the exact timing of its maturity and the funds may not be available until the death of the insured; and
11. that the Purchaser has the right to rescind a Purchase Agreement within fifteen (15) days of the date the Purchase Agreement is executed by all parties and the Purchaser has received the disclosures contained herein.
B. The written disclosures required under this Subsection shall be conspicuously displayed in any Purchase Agreement furnished to the Purchaser by a Provider or Sales Agent. The disclosures need not be furnished in an invitation to inquire, the objective of which is to create a desire to inquire further about effectuating a Purchase Agreement. The invitation to inquire may not quote rates of return, may not include material attendant to the execution of any specific Sales Contract, and may not relate to any specific policy.
C. No Person shall misrepresent the rate of return, or the date on which any payment will be made, to a Purchaser.

Section 9. General Rules.

A. A Provider entering into a Sales Contract with any Owner of a policy, wherein the insured is terminally or chronically ill, shall first obtain:
1. a written statement from a licensed attending physician that the Person is of sound mind and under no constraint or undue influence; and
2. a witnessed document in which the terminally or chronically ill Owner, who is also the insured, consents to the Sales Contract, acknowledges the catastrophic or life-threatening illness, represents that such Person has a full and complete understanding of the Sales Contract and that such Person has a full and complete understanding of the benefits of the life insurance policy, releases medical records necessary to effectuate the Sales Contract, and periodically updates the life expectancy status and for no other purpose, and acknowledges that such Person has entered into the Sales Contract freely and voluntarily.
B. All medical information solicited or obtained by any licensee shall be subject to the applicable provision of state law relating to confidentiality of medical information, if not otherwise provided in this Act.
C. All Sales Contracts and Purchase Agreements entered into in this state shall provide that the Owner may rescind the Contract on or before fifteen (15) days after the date it is executed by all parties thereto.
D. Within three business days after receipt from the Owner of documents to effect the transfer of the insurance policy, the Provider shall pay the proceeds of the settlement to an escrow or trust account managed by a trustee or escrow agent in a state or federally chartered financial institution pending acknowledgement of the transfer by the issuer of the policy. The trustee or escrow agent shall be required to transfer the proceeds due to the Owner within three business days of acknowledgement of the transfer from the insurer.
E. Failure to tender the Sales Contract proceeds to the Owner by the date disclosed to the Owner renders the Contract voidable by the Owner for lack of consideration until the time the proceeds are tendered to and accepted by the Owner. A failure to give written notice of the right of rescission hereunder shall toll the right of rescission until thirty days after the written notice of the right of rescission has been given.
F. Any fee paid by a Provider, party, individual, or an Owner to a Broker in exchange for services provided to the Owner pertaining to a Sales Contract shall be computed as a percentage of the offer obtained, not the face value of the policy. Nothing in this Section shall be construed as prohibiting a Broker from reducing such Broker's fee below this percentage if the Broker so chooses.
G. The Broker shall disclose to the Owner the amount of any and all fees paid to a Broker which relate to the Sales Contract in which the Owner has engaged.
H. Except as herein provided, if a Sales Contract is entered into within the two (2) year period commencing with the date of issuance of the policy or certificate to be acquired, the Sales Contract is void and unenforceable by either party. Notwithstanding the foregoing provision, such a Contract shall be valid and enforceable if:
1. the Owner certifies to the Provider that one or more of the following conditions have been met within such two (2) year period:
a. the policy was issued upon the Owner’s exercise of conversion rights arising out of a group or term policy, provided the total of the time covered under the conversion policy plus the time covered under the group policy is at least 24 months. The time covered under the group policy shall be calculated without regard to any change in insurance carriers, provided coverage has been continuous and under the same group sponsorship;
b. the Owner of the policy is a charitable organization exempt from taxation under 26 U.S.C. s.501(c)(3);
c. the Owner of the policy is not a natural Person, but is the original Owner of the policy;
d. the Sales Contract was entered into before [the date of adoption of such law];
e. the Owner submits evidence to the Provider that one or more of the following conditions have been met within the two (2) year period:
(i) the Owner or insured is diagnosed with an illness or condition that is either (a) terminal or chronic, or (b) requires a course of treatment for a period of at least three (3) years of long term or home health care, and such condition was not know to the Owner or insured at the time the Sales Contract was entered into;
(ii) the Owner's or Insured's spouse dies;
(iii) the Owner or insured becomes physically or mentally disabled and a physician determines that such disability prevents the Owner or insured from engaging in any and every gainful occupation for which he or she is reasonably qualified, based on education, training or experience;
(iv) the Owner was the insured's employer at the time the policy or certificate was issued and such employment relationship terminates;
(v) the Owner or insured becomes insolvent or acknowledges in writing his or her inability to pay debts as they fall due, any petition filed by or against the Owner or insured in connection with any bankruptcy, insolvency or other proceeding, a receiver is appointed for a substantial portion of the Owner’s or insured’s assets, or the Owner or insured makes an assignment for the benefit of creditors.
[Drafting Note: Each state may want to clarify what evidence may be necessary to substantiate each of these conditions.]
Copies of the independent evidence under Section 9H shall be submitted to the insurer when the Provider submits a request for verification of coverage. Such copies shall be accompanied by a letter of attestation from the Provider that the copies are true and correct copies of the documents received by the Provider. The insurer shall respond to the request in the same time frame allotted for responding to the verification of coverage. The insurer’s response shall indicate to the Provider whether, based on the medical evidence documents provided under this Section, the insurer intends to pursue further investigation regarding the validity of the insurance contract. Nothing in this Section shall prohibit an insurer from exercising its right to contest the validity of any policy.

Section 10. Authority to Promulgate Regulations; Conflict of Laws.

A. The Commissioner may:
1. promulgate regulations implementing Sections 1 to 14 of this Act and regulating the activities and relationships of Providers, Brokers and Sales Agents, insurers and their agents, subject to statutory limitations on administrative rule making;
2. establish standards for evaluating reasonableness of payments under Sales Contracts, and;
3. establish appropriate licensing requirements and fees and standards for continued licensure for licensees.
[Drafting Note: Fees need not be mentioned if the fee is set by statute.]
B. Conflict of Laws
1. If there is more than one Owner on a single policy, and the Owners are residents of different states, the Sales Contract shall be governed by the law of the state in which the Owner having the largest percentage ownership resides or, if the Owners hold equal ownership, the state of residence of one Owner agreed upon in writing by all of the Owners.
2. If there is more than one Purchaser on a single policy, and the Purchasers are residents of different states, the Purchase Agreement shall be governed by the law of the state in which the Purchaser, purchasing the largest percentage ownership resides or, if the Purchasers seek equal ownership, the state of residence of one Purchaser agreed upon in writing by all of the Purchasers.
3. A Provider from this state who enters into a Purchase Agreement with a Purchaser who is a resident of another state that has enacted statutes or adopted regulations governing Purchase Agreements, shall be governed in the effectuation of that Purchase Agreement by the statutes and regulations of the Purchaser’s state of residence. If the state in which the Purchaser is a resident has not enacted statutes or regulations governing Purchase Agreements, the Provider shall give the Purchaser notice that neither state regulates the transaction upon which he or she is entering. For transactions in these states, however, the Provider is to maintain all records required as if the transactions were executed in his or her state. However, the forms used in those states need not be approved by the Department.
4. A Provider from this state who enters into a Sales Contract with an Owner who is a resident of another state that has enacted statutes or adopted regulations governing Sales Contracts, shall be governed in the effectuation of that Sales Contract by the statutes and regulations of the Owner’s state of residence. If the state in which the Owner is a resident has not enacted statutes or regulations governing Purchase Agreements, the Provider shall give the Owner notice that neither state regulates the transaction upon which he or she is entering. For transactions in those states, however, the Provider is to maintain all records required if the transactions were executed in the state of residence. The forms used in those states need not be approved by the Department.
5. If there is a conflict in the laws that apply to an Owner and a Purchaser in any individual transaction, the laws of the state that apply to the Owner shall take precedence and the Provider shall comply with those laws.

Section 11. Prohibited Practices.

It is unlawful for any Person:
A. to enter into a Sales Contract if such Person knows or reasonably should have known that the life insurance policy was obtained by means of a false, deceptive or misleading application for such policy;
B. to, in the solicitation or sale of a Purchase Agreement:
1. employ any device, scheme or artifice to defraud;
2. obtain money or property by means of an untrue statement of material fact or by any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
3. engage in any transaction, practice or course of business which operates or would operate in a fraud or deceit upon a Person;
C. to engage in any transaction, practice or course of business if such Person knows or reasonably should have known that the intent was to avoid the notice requirements of this Section;
D. to engage in any fraudulent act or practice in connection with any transaction relating to any settlement involving an Owner or Purchaser who is a resident of this state.

Section 12. False Representations; Deceptive Words.

A. It is unlawful for a Person in the advertisement, offer, or sale of a Purchase Agreement to misrepresent that such an agreement has been guaranteed, sponsored, recommended, or approved by the state, or any agency or officer of the state or by the United States or any agency or officer of the United States. An advertisement shall not use the name or title of a life insurance company or insurance policy unless prior written approval has been obtained from the life insurance company.
B. It is unlawful for a Person in conjunction with the sale of a Purchase Agreement to directly or indirectly misrepresent that the Person has been sponsored, recommended, or approved, or that the Person’s abilities or qualifications have in any respect been passed upon, by this state or any other state, or any agency or officer thereof, or by the United States or any agency or officer thereof.
C. It is unlawful for a Person in the offer or sale of a Purchase Agreement to obtain money or property by:
1. a misrepresentation that the Purchase Agreement purchased, offered, or sold is guaranteed, sponsored, recommended, or approved by this state or any other state, or any agency or officer thereof, or by the United States or any agency or officer thereof;
2. a misrepresentation that the Person is sponsored, recommended, or approved, or that the Person's abilities or qualifications have in any respect been passed upon, by this state or any other state, or any agency or officer thereof, or by the United States or any agency or officer thereof;
3. a misrepresentation that a Purchase Agreement is guaranteed by any insurance guaranty fund; or
4. a misrepresentation that a Purchase Agreement is "guaranteed", that the principal is "safe", or that the Purchase Agreement is free of risk.
D. Paragraphs A, B and C may not be construed to prohibit a statement that the Person is licensed or appointed under this part if such a statement is required by this part or rules adopted under this part, if the statement is true in fact, and if the effect of the statement is not misrepresented;
E. The Commissioner may allow exceptions to this Section, by rule.

Section 13. Injunctions; Civil Remedies; Cease and Desist.

A. In addition to the penalties and other enforcement provisions of this Act, if any Person violates this Act or any rule implementing this Act, the Commissioner may seek an injunction in a court of competent jurisdiction in the county where the Person resides or has a principal place of business and may apply for temporary and permanent orders that the Commissioner determines necessary to restrain the Person from further committing the violation.
B. Any Person damaged by the acts of another Person in violation of this Act or any rule or regulation implementing this Act, may bring a civil action for damages against the Person committing the violation in a court of competent jurisdiction.
C. A violation of this Act attendant to the execution of a Purchase Agreement renders such Purchase Agreement voidable by the Purchaser. Suit for damages may be brought in a court of competent jurisdiction.
D. The Commissioner may issue a cease and desist order upon a Person who violates any provision of this part, any rule or order adopted by the Commissioner, or any written agreement entered into with the Commissioner, in accordance with this State’s Act governing administrative procedures.
E. When the Commissioner finds that such an action presents an immediate danger to the public and requires an immediate final order, he may issue an emergency cease and desist order reciting with particularity the facts underlying such findings. The emergency cease and desist order is effective immediately upon service of a copy of the order on the respondent and remains effective for 90 days. If the department begins non-emergency cease and desist proceedings under paragraph A, the emergency cease and desist order remains effective, absent an order by an appellate court of competent jurisdiction pursuant to [cite the state’s administrative procedure Act]. In the event of a willful violation of this Act, the trial court may award statutory damages in addition to actual damages in an additional amount up to three times the actual damage award. The provisions of this Act may not be waived by agreement. No choice of law provision may be utilized to prevent the application of this Act to any settlement in which a party to the settlement is a resident of this state.

Section 14. Unfair Trade Practices.

A violation of Sections 1 to 14 of this Act shall be considered an unfair trade practice pursuant to state law and subject to the penalties provided by state law.

Section 15. Effective Date.

No Provider transacting business in this state may continue to do so after [INSERT DATE] unless it is in compliance with Sections 1 to 14 of this Act.