Life settlements are transactions that involve the purchase and sale of life insurance policies. Every state has its own rules and regulations considering life settlements.
Currently, there are 42 states regulating life settlement transactions with the addition of Puerto Rico. You must understand the laws specific to your state if you are thinking of engaging in a life settlement.
You should especially learn about life settlement regulations if you live in Texas. The following is how life settlements are regulated in Texas:
- Definition of Life Settlements
The regulation of life settlements in Texas starts right from the definition. There will be overlaps and differences between how life settlements are defined in various states.
Under Texas law, a life settlement contract is defined as “a written agreement entered into between a provider and an owner establishing the terms under which compensation or anything of value will be paid and is less than the expected death benefit of the insurance policy, in return for the owner’s assignment, transfer, devise, or bequest of the death benefit or a portion of an insurance policy or certificate of insurance for compensation.”
It is important to note the definition because life settlements are different from viatical settlements which involve the transfer of life insurance policies of those that are terminally ill. Life settlements, on the other hand, do not.
- First Level Transactions
In Texas, there are specific regulations for first level life settlement transactions. An expert from qcapital.com/learning/eligible-states/texas-life-settlements/ stated that first level transactions involve the direct sale of a life insurance policy from the holder to the buyer. The laws regulating the first level life settlement transactions are regulated under the Texas Insurance Code and by the Texas Department of Insurance. They are meant to protect the policyholders and to create registration requirements for businesses involved in life settlements.
There can be a broker who negotiates the first level life settlement transaction. However, under Texas law, the broker must act in the best interest of the policyholder. A broker also requires a license from the Texas Department of Insurance. You can check online if you are eligible for a license. You need to apply for the license and meet certain requirements as they relate to competence, goodwill, and reputation.
An exception can be made for acquiring a license when attorneys, CPAs, and financial planners negotiate the deals on behalf of their clients. However, those professionals need to have the proper licenses to operate in their specific fields under state law.
The licensing requirements are the main avenue through which Texas State law regulates life settlements. They include terms for license revocation, suspension, and renewal.
Moreover, life settlement contract forms and disclosure statements need to be filed with the insurance commissioner of the state of Texas. They must be approved by the commissioner before they are passed.
Policyholders that want to engage in life settlements within five years of taking out the policy have to file reports with the insurance commissioner. It is meant to prevent life insurance policyholders from taking out policies with the sole purpose of selling them.
- Second Level Transactions
As stated above, there is a secondary marketplace for life settlements where you can buy and sell life insurance policies. They are sold and prices just as regular financial instruments like stocks are.
On the other hand, second-level transactions are not regulated by the Texas Insurance code as is the case with first level transactions. There are many questions as to how state laws regulate second level life settlement transactions.
There was a court case in a Texas court that deemed a life settlement was not a security. Therefore, it could not be treated as such.
There are several other cases in Texas where the Howey Test has been used to test if life settlements were indeed securities. The Howey Test stems from a court case between the SEC and W.J. Howey Co. in 1946.
The test proves if an investment contract is worth security regulation. The test involves ascertaining whether investors purchase the policies with an expectation of profits arising from a common enterprise that depends upon the efforts of others.
The last part of the test is where life settlements fail as they are not subject to the endeavors of others but the longevity of the holder. The SEC is the sole authority responsible for regulating the secondary life settlement transactions in Texas.
In conclusion, defining the regulation of life settlements in Texas is a much more delicate matter than outlined above. The main way in which lifetime settlements are regulated in Texas regards licensing requirements. There are essentially no regulations for second-level life settlement transactions.