Oregon Life Settlements

Life settlements in Oregon

A policyowner who no longer needs, wants or can afford a life insurance policy has more choices than letting it lapse or surrendering it for its cash value. One of them is to sell it. In a life settlement, the owner transfers the policy to a buyer for a lump sum that is more than the cash surrender value but less than the death benefit. The buyer then pays the premiums and collects the death benefit when the insured dies. When the insured is terminally or chronically ill the transaction is often called a viatical settlement, and Oregon law lets the two terms be used interchangeably.

Because the seller is often elderly or ill and the buyer profits from the insured’s death, Oregon regulates who may arrange these sales and how.

Life settlements (ORS 744.318 to 744.384; OAR 836-014-0200 to 0330)

Key definitions (ORS 744.318)

• A life settlement contract is a written agreement under which the owner assigns, transfers, sells, devises or bequeaths the death benefit or ownership of a policy in return for compensation that is less than the expected death benefit
• A life settlement contract does not include a policy loan or an accelerated death benefit paid by the insurer under the policy’s terms, an agreement among people closely related to the insured by blood or law, a business succession arrangement such as a buy-sell agreement, an employer’s purchase of insurance on an employee, or a loan secured by the policy from a bank or other licensed lender
• Chronically ill means unable to perform at least two activities of daily living (such as eating, toileting, moving around, bathing or dressing), or needing substantial supervision because of severe cognitive impairment
• Terminally ill means having an illness that can reasonably be expected to result in death in 24 months or less (OAR 836-014-0205)

The parties

Party	Role	License (Oregon)
Owner	Sells the policy	None
Life settlement provider	Buys the policy or arranges its purchase	Life settlement provider license (ORS 744.321)
Life settlement broker	Negotiates on behalf of the owner for a fee or commission	Life settlement broker license, with an exception for life producers (ORS 744.323)
Life settlement investment agent	Deals with investors (purchasers) on behalf of a provider	Life settlement investment agent license (ORS 744.324)

A life producer acting as a broker

A life insurance producer who has been licensed with a life line of authority for at least one year, either as an Oregon resident producer or in the producer’s home state while holding an Oregon nonresident license, meets the licensing requirement and may act as a life settlement broker (ORS 744.323(2)). Under the Director’s rules the producer must still apply for the broker license within 30 days after first acting as a broker, and must have an anti-fraud plan in place (OAR 836-014-0320). A life settlement broker may not also be licensed as a life settlement investment agent.

Two duties define the broker:

• A life settlement broker represents only the owner, not the insurer or the provider, and owes the owner a fiduciary duty to act on the owner’s instructions and in the owner’s best interest, however the broker is paid (ORS 744.318(7))
• A broker may not seek compensation from the owner without the owner’s written agreement, obtained before the broker performs any services (OAR 836-014-0320)

Contracts and the right to rescind (ORS 744.341)

• A life settlement contract must be in writing, and the provider may use a contract form or disclosure statement form only after the Director has approved it
• Every contract must let the owner rescind it within 60 days after it is executed by all parties or 30 days after the owner receives the proceeds, whichever period is shorter. To rescind, the owner returns the proceeds
• If the insured dies during the rescission period, the contract is treated as rescinded, subject to the owner or the owner’s estate repaying the proceeds and any premiums and loan amounts paid (ORS 744.354(1)(f))
• The contract may not restrict how the owner uses the proceeds, and it must state the effect of the sale on any riders or supplemental benefits attached to the policy, including family, spouse and children’s riders (OAR 836-014-0250)

Disclosures to the owner (ORS 744.354)

No later than when the application for a life settlement is signed, the provider or broker must give the owner a separate, signed disclosure document stating, among other things, that:

• Alternatives exist, including accelerated death benefits or policy loans under the policy itself
• A life settlement broker represents only the owner and owes the owner a fiduciary duty
• Some or all of the proceeds may be taxable, and the owner should consult a tax adviser
• The proceeds may be subject to the claims of creditors
• Receiving proceeds may affect eligibility for public assistance or other government benefits
• The owner has the right to rescind within the periods above
• Funds will be sent to the owner within three business days after the provider receives the insurer’s acknowledgment that ownership has been transferred
• Selling the policy may keep the owner from qualifying for new life insurance later, and may forfeit rights under the policy such as conversion rights and waiver of premium
• The insured’s medical, financial and personal information may be disclosed as needed to complete the settlement

The owner must also receive a brochure describing the life settlement process, in a form the Director approves. The provider must separately disclose its affiliations, the broker’s name and compensation, and every offer and counteroffer received.

After the sale, contact with the insured to check on health status is limited to once every three months if the insured’s life expectancy is more than one year, and once a month if it is one year or less (ORS 744.354(1)(j)).

Waiting period (ORS 744.367)

A person may not enter into a life settlement contract before a policy is applied for or issued, or within five years of the policy’s issue date, unless one of the statutory exceptions applies. The exceptions include:

• The owner or insured is terminally or chronically ill
• The owner’s spouse dies, or the owner divorces
• The owner retires from full-time employment
• The owner becomes disabled and a qualified health care provider determines the disability prevents full-time work
• The owner is adjudicated bankrupt or insolvent
• The policy came from a conversion of earlier coverage, and the combined time under both is at least 60 months

A settlement is also allowed more than two years after issue if, throughout those first two years, the premiums were paid only with unencumbered assets provided by the insured, a person closely related to the insured, someone with a lawful substantial economic interest in the insured’s continued life, or a trust for any of them; no one had agreed to guarantee that financing or to buy the policy, and neither the insured nor the policy had been evaluated for settlement.

Sidenote

Know this...

The five-year waiting period is aimed at stranger-originated life insurance (STOLI): a policy bought at the urging of investors, with money they supply, so that it can be sold to them. A life insurance policy has to be bought to meet the insured’s own needs. It may not be bought to be sold.

Payments to an ill insured (OAR 836-014-0270)

When the insured is terminally or chronically ill, the payment must be fair and equitable and may not be less than a minimum percentage of the face amount (less outstanding loans), set by the insured’s life expectancy. The minimum ranges from 85 percent where life expectancy is under six months down to 50 percent (or the cash surrender value or accelerated death benefit, if greater) where it is 36 months or more. When the insured is not ill, the owner must still receive a reasonable return.

Notices from the life insurer (ORS 744.362)

When the insured under an individual life policy is 60 or older, the insurer must send the owner a conspicuous notice whenever the owner asks to surrender the policy in whole or in part, asks for an accelerated death benefit, or is sent a lapse notice (other than on a term policy). The notice reads: “Life insurance is a critical part of a broader financial plan. There are many options available, and you have the right to shop around and seek advice from different financial advisers in order to find the option best suited to your needs.” It must also tell the owner how to contact the Division of Financial Regulation.

Advertising and unfair practices

Life settlement advertising must be truthful and not misleading. An advertisement that mentions how quickly a settlement happens, or how much owners receive, must disclose average times and average purchase prices over the past six months (OAR 836-014-0300). Violating the payment, disclosure, contact, advertising or reporting rules is an unfair trade practice (OAR 836-014-0330).

Lesson summary

• A life settlement is the sale of a life policy to a third party for less than its death benefit. Policy loans and accelerated death benefits paid by the insurer are not life settlements (ORS 744.318).
• Providers, brokers and investment agents must be licensed. A life producer licensed with life authority for at least one year may act as a life settlement broker, applying for the broker license within 30 days of first doing so (ORS 744.323; OAR 836-014-0320).
• A life settlement broker represents only the owner and owes the owner a fiduciary duty.
• Contracts are written, on Director-approved forms, and the owner may rescind within 60 days of execution or 30 days after receiving the proceeds, whichever is shorter (ORS 744.341).
• The owner receives signed disclosures about alternatives, taxes, creditors, public assistance, rescission, the loss of future insurability and conversion or waiver rights, and a brochure (ORS 744.354).
• No life settlement within five years of issue unless an exception applies, such as terminal or chronic illness, death of a spouse, divorce, retirement, disability or bankruptcy (ORS 744.367).
• Insurers send a notice to owners 60 or older before a surrender, an accelerated benefit request or a lapse (ORS 744.362).