Life settlement contracts

A sale of an existing policy interest

A life settlement exchanges an owner's interest in a life insurance policy for present compensation. The insured remains the person whose life is covered. In a typical full sale, the purchaser acquires the death benefit and takes responsibility for future premiums. The owner's former beneficiaries lose the benefit sold. California's definition requires a written agreement with a provider: compensation is less than the expected death benefit, while the minimum value must exceed a cash surrender value or accelerated death benefit available at application. An insurer's policy loan or contractual accelerated death benefit is excluded from this definition.

Who may act

California generally requires a license to enter into, broker, or solicit settlements. An individual broker ordinarily must complete at least 15 hours of approved life settlement education before operating. A life producer licensed as a life agent for at least one year, or as a licensed nonresident producer in California for one year, qualifies for the statutory broker pathway and is exempt from that education requirement. That is a broker pathway, not provider authority. A retained attorney, certified public accountant, or nationally accredited financial planner can negotiate for the owner without a broker license if compensation is not paid directly or indirectly by the provider or purchaser. The broker represents the owner exclusively and owes a fiduciary duty.

Disclose before the decision

At application, required written disclosures must be signed by the owner and use at least 12-point type. They include alternatives such as accelerated benefits, potential taxation, relationships among the parties, and the broker's duty. Some or all proceeds may be taxable; obtain professional tax advice. Before all parties execute the contract, the provider must disclose the gross purchase price, the amount paid to the owner, the amount paid to the broker, and the broker's contact information in a document signed by the owner. Gross price includes commissions and fees. Before signing, the broker must disclose the full offer history, affiliations, and obtained life expectancy estimates, subject to privacy law.

Protect the insured

For disclosures necessary to effect the settlement, California requires prior written consent from both owner and insured. Status or address contacts are limited to once every three months when life expectancy exceeds one year, and once per month when it is one year or less. Life expectancy is an estimate, not a promised death date. Stranger-originated life insurance is included among fraudulent life settlement acts; an ordinary sale of an existing policy should not be confused with arranging insurance for strangers from the outset.