Hawaii Governor Lingle Signs Bill To Protect Life Insurance Consumers

Administration to seek additional safeguards and oversight of life insurance settlements

June 16, 2008 -- HONOLULU – Hawaii Governor Linda Lingle today signed into law a bill to protect individuals – specifically senior citizens and people suffering from chronic or terminal illness – from fraudulent activity relating to the selling and buying of life insurance policies.

While the new law provides added measures to protect consumers, the Governor said it does not go far enough in safeguarding against unscrupulous individuals who exploit and prey on vulnerable residents because of their age or medical condition. The Lingle-Aiona Administration will seek additional protections and industry oversight in the 2009 legislative session.

HB94 HD1 SD2 CD1 addresses the issue of life insurance settlement contracts – called viatical settlement or life settlement contracts – in which the owner of a life insurance policy who might need money because of a terminal or chronic medical condition sells his or her policy to a broker in return for a portion of the death benefit. The broker then sells shares of the policy to investors who collect on the life insurance when the individual dies.

Viatical settlement contracts are legal, but individuals who enter such agreements for the financial benefits may face unexpected taxes, transaction fees, loss of insurance capacity, legal costs and the loss of privacy of their medical records.

This bill, which becomes Act 177, gives the Department of Commerce and Consumer Affairs (DCCA) the authority to license brokers and insurance salesmen who negotiate life settlement contracts, and allows DCCA to conduct investigations and examinations of brokers and life insurance writers who engage in these transactions.

“This new law builds on our continuing effort to protect Hawai‘i residents, especially our kūpuna and other vulnerable citizens, from fraud,” said Governor Lingle. “While Act 177 will help reduce the potential for fraudulent abuse relating to life insurance settlements, my Administration will reintroduce a bill containing several initiatives we originally proposed but lawmakers rejected that will provide increased safeguards and greater oversight.”

The Lingle-Aiona Administration’s bill (HB3099 / SB3021) introduced this session included a requirement that brokers obtain a bond to ensure financial responsibility. Act 177 does not contain this requirement.

The Administration also advocated prohibiting an investor from collecting on a viatical settlement for five years after the initial policy holder bought his or her insurance policy. The five-year ban would help ensure the policy is not purchased for the purpose of a resale. It also would result in a lower rate of return because the investor must wait longer to collect. Act 177 includes only a two-year prohibition.

Act 177 requires the Insurance Commissioner to report to the 2009 and 2010 Legislatures on the law’s effectiveness and any recommended adjustments. Act 177 takes effect immediately and terminates on June 30, 2010.

Source: Hawaii Governor