An overview of how life settlements are regulated in the United States, including the role of state insurance commissioners, the NAIC model acts, and key consumer protections.
Life Settlements Are a Regulated Industry
Life settlements are not an unregulated market. They are governed by a framework of state insurance laws, built on model legislation developed by the National Association of Insurance Commissioners (NAIC). The majority of states have enacted laws regulating life settlement transactions.
As FINRA notes: "Life insurance is regulated by state insurance commissioners, and variable life insurance products are also regulated at the national level by the Securities and Exchange Commission (SEC) and FINRA."
This means that life settlement providers and brokers are generally required to be licensed, and consumers have specific protections under state law.
The NAIC Model Acts
The NAIC has developed two key model acts that form the basis for most state regulation:
- Viatical Settlements Model Act (#697) — Originally focused on viatical settlements (involving terminally or chronically ill policyowners), this model act has been revised to include life settlements more broadly.
- Viatical Settlements Model Regulation (#698) — Provides detailed implementation rules, including disclosure requirements, licensing standards, and prohibited practices.
States adopt and adapt these model acts into their own laws. While the specifics vary by state, the core protections are broadly consistent.
Key Consumer Protections
While protections vary by state, common regulatory features include:
Licensing Requirements
Life settlement providers and brokers must typically be licensed by the state insurance department. This means they are subject to regulatory oversight, must meet financial standards, and can be disciplined for violations.
As FINRA advises: "Check with your state insurance commissioner to see whether the life settlement company or broker is licensed."
Disclosure Requirements
Most state regulations require providers to disclose key information to the policyowner before a transaction is completed, including:
- The amount the provider will receive from the policy
- The relationship between the provider and any broker involved
- Alternatives to the life settlement
- The tax consequences that may result
- The impact on government benefits (such as Medicaid)
Right of Rescission
Many states provide a rescission period — a window of time after the sale during which the policyowner can cancel the transaction and have the policy returned. This is typically a short period (for example, 15 days in some states), but it provides an important safety net.
Privacy Protections
State regulations typically restrict how the policyowner's personal and medical information can be shared. The NAIC model act includes provisions requiring confidentiality of medical and policy information, which may only be shared with parties necessary to complete the transaction.
Anti-Fraud Provisions
State insurance departments investigate fraud in life settlement transactions. The NAIC has encouraged information sharing among state and federal regulators to detect and prevent fraudulent activity.
Prohibited Practices
Most state regulations prohibit certain practices, such as:
- Entering into a life settlement within a specified period after the policy was issued (to discourage Stranger-Originated Life Insurance, or STOLI)
- Making material misrepresentations about the settlement
- Failing to disclose conflicts of interest
Variable Life Settlements
If the policy being sold is a variable life insurance policy, the transaction may also be subject to federal securities laws and FINRA rules. This adds an additional layer of regulation and consumer protection.
How to Verify a Provider's Status
Policyowners can take practical steps to verify they are dealing with a regulated, licensed provider:
- Contact the state insurance department — Most state insurance departments maintain online databases where consumers can verify a provider or broker's license.
- Ask for the license number — A licensed provider should be able to provide their state license number.
- Review disclosure documents — State-regulated providers are required to provide specific disclosures before a transaction is completed.
What Regulation Does and Does Not Do
Regulation provides important protections, but it does not guarantee that a life settlement is the right choice for any individual. Regulation ensures that the process is transparent and that providers are accountable — but the decision to sell a policy is a personal one that should be made with professional advice.
Regulation also does not replace the need to consult independent advisors. A licensed life settlement provider or broker represents one side of the transaction. Policyowners are encouraged to consult their own financial, tax, and legal advisors before proceeding.
California-Specific Regulations
Because Spotswood Capital operates under a California life insurance license, it is worth noting some California-specific regulatory points. California has been an active regulator in the life settlement space.
California Department of Insurance
The California Department of Insurance (CDI) regulates life settlement providers and brokers operating in the state. The CDI's Investigation Division actively investigates fraud and ensures compliance with California's life settlement laws.
California law requires:
- Licensing of life settlement providers and brokers
- Disclosures to policyowners before a transaction
- Privacy protections for medical and policy information
- Reporting of life settlement transactions to the state
California's Approach to STOLI
California has enacted specific provisions to address Stranger-Originated Life Insurance (STOLI), including a prohibition on entering into a life settlement within two years of policy issuance under certain circumstances. This is designed to protect against practices where policies are purchased primarily for the purpose of selling them to investors.
Other States
Life settlement regulations exist in most states, but the specifics vary. If you are considering a life settlement and your policy or your state of residence is different from California, you should check with your state's insurance department for the specific rules that apply.
You can find your state insurance department through the National Association of Insurance Commissioners (NAIC) website at naic.org, which provides a directory of state insurance regulators.
The Bottom Line on Regulation
The life settlement industry operates within a regulatory framework designed to protect consumers. While regulation does not eliminate all risk — and does not replace the need for independent professional advice — it provides important safeguards:
- Providers must be licensed and are subject to oversight
- Consumers receive required disclosures before transactions
- Privacy of medical and financial information is protected
- Rescission periods allow consumers to reverse a decision
- Fraud is investigated and prosecuted by state regulators
Understanding these protections is part of being an informed policyowner. Using them — by verifying licenses, reading disclosures, and exercising rescission rights if needed — is part of making a sound decision.
Sources & References
Educational Disclaimer
This article is provided for general informational and educational purposes only. It does not constitute legal, tax, financial, or investment advice. It is not a recommendation to sell, keep, or modify any life insurance policy, annuity, or financial product. Spotswood Capital LLC does not predict eligibility, settlement value, approval outcomes, court outcomes, tax results, or legal results. You are encouraged to consult with your own financial, tax, and legal advisors before making any decision about your policy.