The NAIC Life Settlements Model Act, Explained Plainly

What the NAIC Is and Why It Writes Model Laws

The National Association of Insurance Commissioners, or NAIC, is the standard-setting organization made up of the chief insurance regulators from all 50 states, the District of Columbia, and the U.S. territories. Insurance in the United States is regulated at the state level rather than by a single federal agency, a structure confirmed by the McCarran-Ferguson Act of 1945. That creates an obvious problem: fifty different legislatures writing fifty completely different insurance codes would make the market chaotic for companies and confusing for consumers.

Model laws are the NAIC’s answer. Commissioners and their staff draft a template statute on a given topic, debate it, take public comment from industry and consumer representatives, and vote to adopt it. Each state legislature then decides whether to enact it, amend it, or ignore it. The result is a patchwork, but a patchwork with a common thread.

For life settlements, the relevant template is the Life Settlements Model Act, designated Model 697. It sits alongside a separate model from the National Conference of Insurance Legislators (NCOIL), and some states borrowed from both. Understanding Model 697 is the fastest way to understand how life settlements are regulated generally, because most state statutes are recognizable variations on its text rather than inventions from scratch.

A Short History: From Viaticals to the 2007 Overhaul

The Model Act did not appear out of nowhere. Its ancestor was the Viatical Settlements Model Act, first adopted in 1993 during the AIDS crisis, when terminally ill policyholders began selling their life insurance to raise money for care. Those early transactions, called viatical settlements, were largely unregulated, and abuses on both the buying and selling sides pushed regulators to act.

As medical treatment improved and the market broadened to seniors who were not terminally ill, the industry evolved into what we now call life settlements. The NAIC revised its model several times to keep pace, with the most consequential overhaul coming in 2007. That revision responded to a wave of stranger-originated life insurance, or STOLI, schemes in which investors induced seniors to take out policies purely so the policies could be flipped to strangers. The 2007 changes added explicit STOLI prohibitions and restrictions on selling a policy within a set period after issuance, subject to hardship exceptions.

All of this rests on a much older legal foundation. The U.S. Supreme Court held in Grigsby v. Russell (1911) that a life insurance policy is transferable property. The Model Act does not create the right to sell a policy; Grigsby did that. The Model Act’s job is to make sure the sale happens under supervision, with licensed intermediaries and informed sellers.

Licensing: Who Must Hold a State License

The centerpiece of the Model Act is licensing. It defines two key roles and requires both to be licensed by the state insurance department before doing business with that state’s residents.

• Providers are the companies that actually purchase policies, becoming the new owner and beneficiary. Under the Model Act they must apply for a license, demonstrate financial responsibility, submit their settlement contract forms for approval, file annual reports, and remain subject to examination by the insurance commissioner.
• Brokers represent the policy owner. The Model Act is blunt about this: a broker represents only the owner and owes a fiduciary duty to the owner, including a duty to act according to the owner’s instructions and in the owner’s best interest, even though the broker’s commission is typically paid out of the transaction proceeds.

That fiduciary language matters enormously in practice. It is the legal hook that requires a broker to shop a policy for competing bids rather than steering it to a favored buyer. The distinction between the two roles is explored in depth in our guide to brokers versus providers.

Most states that regulate life settlements license both roles through the state insurance department. A consumer can verify any license by contacting that department directly; in New Jersey, for example, that is the Department of Banking and Insurance.

Disclosure Requirements: What Sellers Must Be Told

The Model Act’s second pillar is mandatory disclosure. Before a policy owner signs a settlement contract, the provider or broker must deliver a series of written disclosures designed to make sure the seller understands exactly what they are giving up and what alternatives exist. The required disclosures include, among other items:

• That there may be alternatives to a settlement, such as accelerated death benefits, policy loans, or simply surrendering the policy — the same trade-offs we cover in life settlement versus surrender.
• That some or all of the proceeds may be taxable, and that the seller should consult a tax advisor. (The actual tax framework comes from IRS Rev. Rul. 2009-13, as modified by the 2017 tax law.)
• That proceeds could affect eligibility for means-tested public benefits such as Medicaid.
• That creditors may be able to reach the proceeds.
• That the seller has the right to rescind the contract within a defined window.
• The amount of the broker’s compensation, so the seller can see what the intermediary is earning.

Disclosure is not a one-time event, either. The Model Act requires that the seller be reminded of key facts at contract signing and that certain information accompany the offer itself. These provisions form the backbone of the protections detailed in our overview of consumer protections in life settlements.

The Rescission Right: A Built-In Cooling-Off Period

Perhaps the most consumer-friendly provision in the entire Model Act is the rescission right. After the settlement contract is executed and proceeds are paid, the seller retains the right to cancel the whole transaction, return the money, and get the policy back. Under the Model Act framework, this window generally runs a set number of days from execution of the contract or from receipt of the proceeds; as adopted across the states, rescission periods typically range from 15 to 30 days depending on the statute.

Two features make this right unusually strong. First, it is unconditional: the seller does not need to show fraud, mistake, or any reason at all. Simple regret is enough. Second, the Model Act extends the protection past death. If the insured dies during the rescission period, the contract is treated as rescinded, subject to repayment of the proceeds, so the death benefit flows to the original beneficiaries rather than the investor. That prevents the grim scenario where a family loses a large death benefit because the insured died days after signing.

The mechanics of exercising the right, including how the funds are returned and what deadlines apply, vary by state and are covered fully in our article on rescission rights. Because the money typically sits with an independent escrow agent during the early stages, unwinding a fresh transaction is more orderly than it might sound, as explained in our walkthrough of the escrow process.

Model Act Provision	What It Requires	Why It Protects Sellers
Provider licensing	Buyers must be licensed, file contract forms, and report annually to the state insurance department	Screens out unvetted buyers and gives regulators enforcement leverage
Broker fiduciary duty	Brokers represent only the policy owner and must act in the owner’s best interest	Legally obligates the intermediary to seek competitive offers for you
Mandatory disclosures	Written notice of alternatives, tax exposure, benefits impact, and broker compensation	Ensures an informed decision before signing
Rescission right	Unconditional cancellation window, typically 15-30 days as adopted by states	Lets you reverse the sale, even after funding, with no reason required
Privacy safeguards	Medical and identifying information shared only under consent and for defined purposes	Limits who sees your health records and how often you are contacted
STOLI prohibition	Bans stranger-originated policies and restricts settling newly issued policies, with hardship exceptions	Keeps the market limited to legitimately owned policies
Escrow requirements	Proceeds held by independent escrow and paid promptly after ownership transfer is confirmed	Prevents a buyer from taking your policy without paying

Privacy and Medical Information Safeguards

A life settlement necessarily involves sharing sensitive medical records, because buyers price policies based on the insured’s life expectancy. The Model Act acknowledges this and builds in confidentiality obligations. Identifying information about an insured may not be disclosed except in defined circumstances: to obtain life expectancy estimates, to effect the settlement itself, to comply with regulators, or with the insured’s consent. Providers and brokers must treat medical and financial information as confidential, and the seller signs specific authorization forms, typically HIPAA-compliant releases, that scope who may see what.

The Act also regulates post-sale contact. After a policy is sold, the new owner needs to track the insured’s health status, but the Model Act limits how often the insured may be contacted for status updates, generally tying contact frequency to the insured’s life expectancy so that people are not pestered with constant check-ins. These tracking contacts are usually routed through a third-party servicing company rather than the investors themselves.

For sellers weighing the privacy trade-off, the practical questions are who holds the records, how long consent lasts, and how to revoke it. We cover those specifics in medical privacy in a life settlement and in our guide to the medical records release itself.

The STOLI Prohibition and Anti-Fraud Provisions

The 2007 revision of the Model Act was driven largely by one problem: stranger-originated life insurance. In a STOLI scheme, an investor arranges for a senior to buy a policy the senior never genuinely wanted, often with premium financing and a wink-and-nod agreement to sell the policy once it is beyond the insurer’s contestability period. This flips the insurable-interest requirement on its head, since the policy exists from day one for the benefit of a stranger who profits from the insured’s death.

The Model Act attacks STOLI from several angles. It defines STOLI explicitly and prohibits it as a fraudulent life settlement act. It restricts settling a policy within a defined period after issuance, with exceptions for genuine hardship events such as terminal illness, divorce, retirement, or bankruptcy, so that legitimate sellers are not trapped while manufactured policies are screened out. It requires certifications that the policy is not STOLI, and it arms commissioners with investigation and enforcement powers, including license revocation and referral for criminal prosecution.

Notably, the Act draws a clean line: a consumer who legitimately bought coverage years ago and later chooses to sell is engaging in a lawful, protected transaction, exactly what a life settlement is supposed to be. The full story of how these schemes work and why regulators shut them down is in our article on STOLI.

How States Have Actually Adopted the Model Act

Because the Model Act is only a template, what matters for any individual seller is what their own state enacted. The broad picture: the substantial majority of states regulate life settlements through statutes derived from the NAIC model, the competing NCOIL model, or a blend of the two, while a small number of states have little or no specific life settlement statute. A 2010 GAO report examined this patchwork and flagged the inconsistency of consumer protections across states as a genuine concern, which accelerated adoption in several jurisdictions.

The differences among states tend to show up in a few recurring places:

• Rescission length: commonly 15 to 30 days, with variations in when the clock starts.
• Waiting periods: how long a policy must be in force before it can be settled, generally two years, with some states using five years for certain situations and most allowing hardship exceptions.
• Broker licensing details: some states let licensed life insurance producers act as brokers after a notification, others require a standalone license.

Our 50-state overview maps these differences, and New Jersey residents can find the specifics of their state’s version, administered by the NJ Department of Banking and Insurance, in our New Jersey complete guide.

What the Model Act Does Not Do

Honest education means being clear about the limits of the Model Act, because it is not a guarantee of a good outcome.

First, it does not set prices. No provision requires a buyer to pay a minimum percentage of face value. Market forces determine offers, and in practice settlements typically pay somewhere between 10% and 35% of face value depending on age, health, policy type, and premium costs, which is typically 4 to 8 times more than cash surrender value but still far less than the death benefit. The Act ensures process fairness, not price adequacy; competitive bidding does the price work, which is why pricing mechanics deserve their own study.

Second, it does not address taxes. Federal tax treatment comes from the IRS, principally Rev. Rul. 2009-13 as modified by the Tax Cuts and Jobs Act of 2017, covered in our tax treatment guide.

Third, it cannot force your state to adopt it. If you live in a state with no settlement statute, the Model Act’s protections simply are not law there, though reputable intermediaries often follow its standards voluntarily.

Finally, it does not evaluate whether selling is wise for you. That judgment, weighing a settlement against surrender, loans, or keeping the policy, remains yours, ideally made with independent advice and a clear-eyed look at the red flags that signal a bad actor.

Why the Model Act Matters to You as a Policy Seller

For a policy owner considering a sale, the Model Act translates into a practical checklist. Because most state laws mirror it, you can reasonably expect, and should insist on, the following in any legitimate transaction:

• Every intermediary you deal with holds a current license from your state insurance department, which you can verify yourself in minutes.
• You receive written disclosures about alternatives, taxes, benefits impact, and the broker’s compensation before you sign anything.
• Your contract contains an unconditional rescission clause consistent with your state’s window, typically 15 to 30 days.
• Your medical information moves only under signed, scoped authorizations.
• Your sale proceeds are held by an independent escrow agent and released when the insurer confirms the ownership change, per the standard escrow process.

If any of those elements is missing, that is a signal to slow down and ask questions, or walk away. The Model Act took a market born in crisis and gave it guardrails; the guardrails only work if sellers know they exist. For the bigger picture of how a transaction actually unfolds from application to funding, see how life settlements work, and for whether you would even be a candidate, start with who qualifies.

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Frequently Asked Questions

Is the NAIC Life Settlements Model Act actually a law I can rely on?

Not directly. The Model Act is a template written by the National Association of Insurance Commissioners, and it has no legal force until a state legislature enacts it. What you can rely on is your own state’s life settlement statute, which in most states is closely based on the Model Act or the similar NCOIL model. To know your exact rights, check the statute in the state where you live, since the law of the policy owner’s state of residence generally governs the transaction. Your state insurance department can tell you what applies.

What is the difference between the NAIC Model Act and the NCOIL Life Settlements Model Act?

Two organizations wrote competing templates. The NAIC model was drafted by state insurance regulators; the NCOIL model was drafted by state legislators. They overlap heavily on licensing, disclosure, and rescission, but they diverge on details such as how long a new policy must be held before it can be settled and exactly how STOLI is defined and policed. Many states blended provisions from both. From a consumer’s seat the practical protections are similar, but the fine print, especially waiting periods, depends on which text your state followed.

Does the NAIC Model Act guarantee me a minimum price for my policy?

No. Nothing in the Model Act sets a floor on what a buyer must offer. Prices come from market competition, driven by the insured’s life expectancy, premium costs, and the policy’s face value. Settlements typically pay 10% to 35% of face value, which is typically 4 to 8 times the cash surrender value, but individual results vary widely and nothing is guaranteed. The Act protects you procedurally, through licensing, disclosure, and rescission, while a broker’s fiduciary duty to shop your policy is what pushes the price upward.

How long is the rescission period under the NAIC Model Act?

The Model Act framework provides an unconditional right to cancel, and as states have adopted it the window typically runs 15 to 30 days depending on the state, measured from contract execution or from receipt of the settlement proceeds. If you rescind, you return the money and your policy ownership is restored. Importantly, the model framework also treats the contract as rescinded if the insured dies within the window, subject to repayment of proceeds, so the original beneficiaries would receive the death benefit in that event.

Which states have adopted the NAIC Life Settlements Model Act?

The large majority of states regulate life settlements with statutes derived from the NAIC model, the NCOIL model, or elements of both, while a small handful of states have no specific life settlement statute. Adoption is not uniform: states modified rescission lengths, waiting periods, and licensing details when they enacted their versions. Because the map changes as legislatures act, the reliable move is to confirm current status with your state insurance department or review a maintained state-by-state overview before assuming any particular protection applies where you live.

Does the NAIC Model Act apply to viatical settlements for terminally ill policyholders?

Generally yes. The modern Model Act grew out of the older Viatical Settlements Model Act, and most state statutes now cover both ordinary life settlements and viatical settlements, which involve insureds who are terminally or chronically ill. Viatical transactions often receive extra protections, such as shorter or waived waiting periods and different tax treatment, since amounts received under a viatical settlement by a terminally ill insured can be excluded from income under federal rules. The definitions section of your state’s statute controls which category your transaction falls into.

Who enforces the NAIC Model Act once a state adopts it?

The state insurance commissioner and their department. Once enacted, the statute gives the department authority to license brokers and providers, approve contract forms, examine licensees’ records, investigate complaints, impose fines, suspend or revoke licenses, and refer fraudulent life settlement acts for criminal prosecution. In New Jersey, that authority sits with the Department of Banking and Insurance. If you believe a broker or provider violated the law, filing a complaint with the insurance department is the standard first step, and it costs nothing.

Why was the NAIC Model Act revised in 2007?

The 2007 overhaul was a direct response to the boom in stranger-originated life insurance. Investors were recruiting seniors to take out large policies they never intended to keep, financing the premiums, and acquiring the policies once the contestability period passed. That practice undermines the insurable-interest principle at the heart of life insurance. The revision defined STOLI, banned it as fraud, restricted settlements of recently issued policies with hardship exceptions, and strengthened disclosure and enforcement, while preserving the legitimate right of longtime policy owners to sell.

Related Reading

• How Are Life Settlements Regulated
• Life Settlement Regulation By State
• Life Settlement Consumer Protections
• Life Settlement Rescission Rights
• Stoli Stranger Originated Life Insurance
• Grigsby V Russell Explained

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.