Introduction
A common concern among policyholders is whether life settlements are legitimate and regulated.
Questions often include:
- Are life settlements legal?
- Who regulates life settlements?
- Is selling a life insurance policy safe?
- Are life settlement brokers licensed?
Because life settlements involve third-party buyers and medical underwriting, understanding the regulatory framework is essential.
If you are unfamiliar with the broader structure of life settlements, begin here:
Read More: How It Works & Policy Options
This article explains how life settlements are regulated in the United States, including licensing standards, disclosure requirements, consumer protections, and oversight mechanisms. This content is educational and does not constitute legal advice.
Are Life Settlements Legal?
Yes.
Life settlements are legal in the United States and are regulated primarily at the state level. The legal foundation for transferring ownership of a life insurance policy dates back to the U.S. Supreme Court case: Grigsby v. Russell, 222 U.S. 149 (1911).
You can read the official case reference here.
In that decision, the Court affirmed that a life insurance policy is a transferable property interest. In other words, a policyholder has the legal right to assign or transfer ownership, subject to applicable laws.
However, legality does not mean an absence of regulation. Modern life settlements operate within structured regulatory frameworks.
Who Regulates Life Settlements?
Life settlements are regulated primarily by state insurance departments. Each state establishes its own statutes governing:
- Licensing requirements
- Disclosure obligations
- Privacy protections
- Anti-fraud measures
- Compensation transparency
- Rescission periods
Oversight is generally handled through the same state insurance departments that regulate insurance carriers and agents.
The U.S. Government Accountability Office (GAO) has confirmed that life settlements are regulated at the state level. This regulatory structure places life settlements within the broader insurance compliance system.
What Is the NAIC Life Settlements Model Act?
The National Association of Insurance Commissioners (NAIC) developed the Life Settlements Model Act to promote uniform consumer protections across states.
The Model Act provides a framework for:
- Licensing life settlement brokers and providers
- Mandatory consumer disclosures
- Rescission rights
- Privacy standards
- Reporting requirements
- Fraud prevention
While each state adopts and modifies statutes independently, many state laws are based on NAIC model language. The goal is to ensure consistent protections across jurisdictions.
Are Life Settlement Brokers and Providers Licensed?
In most states, yes.
Life settlement brokers and providers are typically required to obtain state licenses. Licensing requirements often include:
- Background checks
- Financial disclosures
- Continuing education requirements
- Regulatory filings
- Compliance audits
Operating without a required license may violate state insurance law. Consumers may verify licensing status through their state insurance department.
What Consumer Protections Exist?
Modern life settlement regulation includes several consumer safeguards. These often include:
1️⃣ Mandatory Written Disclosures
Before a transaction is completed, sellers typically receive written disclosures explaining:
- Alternatives to selling
- Possible tax implications
- Effect on public benefits
- Compensation structures
- Right of rescission
2️⃣ Rescission Period
Most states require a rescission period after closing. This period is often between 15 and 30 days. During this window, the seller may:
- Cancel the transaction
- Repay the settlement funds
- Recover ownership of the policy
This safeguard provides a cooling-off period.
3️⃣ Privacy Protections
Medical records used in underwriting must comply with:
- Federal HIPAA regulations
- State insurance privacy laws
Information may only be used for authorized underwriting purposes.
4️⃣ Anti-Fraud Provisions
State statutes often include measures designed to prevent:
- Stranger-originated life insurance (STOLI) schemes
- Fraudulent policy transfers
- Misrepresentation in underwriting
Regulatory enforcement may include penalties for violations.
What Is STOLI and Why Is It Regulated?
STOLI stands for “Stranger-Originated Life Insurance.” These arrangements historically involved purchasing policies with the intent to immediately sell them to investors.
Most states have enacted laws prohibiting or restricting STOLI arrangements. Regulation aims to ensure that life settlements involve legitimate, in-force policies that were not originally procured for speculative resale. This distinction helps protect the integrity of the secondary market.
Are Life Settlements Federally Regulated?
Life settlements are primarily regulated at the state level rather than by a single federal agency. However, certain federal laws may apply indirectly, including:
- HIPAA privacy rules
- Federal tax law (IRS Revenue Ruling 2009-13)
- Securities regulations in certain institutional contexts
Primary transactional oversight remains within state insurance departments.
Does Regulation Make Life Settlements “Safe”?
Regulation does not eliminate risk. It establishes:
- Licensing standards
- Disclosure requirements
- Enforcement mechanisms
- Defined legal processes
Safety depends on:
- Working with properly licensed professionals
- Understanding risks
- Evaluating tax impact
- Considering estate planning implications
Read More: Risks of Selling a Life Insurance Policy
Read More: How the Life Settlement Process Works
How Can Consumers Verify Regulation in Their State?
Policyholders may:
- Contact their state insurance department
- Review state insurance codes
- Confirm broker/provider licensing status
A directory of state insurance departments is available through the NAIC website. Verifying licensing is a prudent step before proceeding.
Frequently Asked Questions
Are life settlements legal in all states?
Life settlements are legal in most U.S. states, though specific regulatory requirements vary by jurisdiction.
Who oversees life settlement companies?
State insurance departments oversee licensing and compliance for brokers and providers.
Can an unlicensed person buy my life insurance policy?
In states requiring licensing, operating without a required license may violate state law. Consumers should verify licensing status before proceeding.
Are life settlements considered securities?
In certain institutional investment contexts, life settlement interests may intersect with securities law. However, individual policy sale transactions are primarily governed by state insurance law.
Need more answers? Check out our Frequently Asked Questions page.
Key Takeaways
Life settlements are:
- Legal property transfers
- Governed primarily by state insurance departments
- Subject to licensing requirements
- Protected by disclosure rules
- Supported by rescission rights
- Structured within regulatory frameworks
They are not informal private agreements. However, regulation does not eliminate financial or planning risk. Understanding both regulation and risk is essential before making a decision.
Read More: Who Qualifies for a Life Settlement?
Ready to see if your policy qualifies safely and compliantly? Start an Educational Review with us today.