Find Out Which States Have Life and Viatical Settlement Regulations
Wednesday, October 27, 2021
Section: Members

More than half of Americans are missing out on an asset that they can use to completely transform their retirement. With rising premiums and other changes in their lives, an unwanted life insurance policy can be their ticket to a well-funded retirement. This is a huge opportunity, and it’s important to be familiar with how it plays out in each state. Let’s see how these updated life settlement laws are handled in your state.


Life Settlements Versus Viatical Settlements

As you are aware, life settlements and viatical settlements have a subtle difference. Viatical settlements, also known as viatical life settlements, a viatical transaction, or just plain viaticals, unlock life insurance policy money for someone facing a shortened lifespan due to a chronic or terminal illness like cancer or Alzheimer’s. When they sell their life insurance policy to a third party, they receive the lump-sum that was agreed to in the negotiations. It will fall somewhere between cash surrender value and the insurance policy face value, or death benefit. Viatical settlements are usually not taxable and have larger payouts than life settlements.
A life settlement or life insurance settlement works the same way for those who do not have a chronic or terminal illness. Those over 70 without a diagnosis can obtain a life settlement; and life settlements typically are taxable.


States with Life Settlement Regulations

The Department of Insurance (DOI) regulates life settlements by state. They approve and maintain any documentation that’s used in a life settlement, and the policy owner or insured’s state is usually the state of jurisdiction. Since regulations are different in each state, it’s important to have the correct license for that state as well as a working knowledge of the laws of the state in which you’re operating.
Right now, only five states and a district do NOT have life or viatical settlement regulations. They are:

  • Alabama

  • South Carolina

  • Wyoming

  • Missouri
  • South Dakota
  • Washington, D.C.

In these states, policyholders can still sell their life insurance policy and they’ll avoid the waiting periods and other stipulations placed upon the industry by regulations. They’ll also pay taxes on any proceeds that exceed what they paid in premiums. However, they will not have the beneficial oversight afforded by regulations to provide the “best interest standard” that gives them valuable disclosures and rescission options and helps them navigate the intricacies of the process and protect their best interests during and after the transaction. 


States with Viatical Settlement Regulations and Life Settlement Regulations

Currently, the following 43 states and the territory of Puerto Rico regulate life settlements. This translates to 90% of the U.S. being protected by comprehensive life settlement regulations and laws. Michigan and New Mexico are not listed because they only regulate viatical settlements, not life settlements. 

States That Regulate Life Settlements

Alaska  Arizona Arkansas California
Colorado Connecticut Delaware Florida
Georgia Hawaii Idaho Illinois
Indiana Iowa Kansas Kentucky
Louisiana Maine Maryland Massachusetts
Minnesota Mississippi Montana Nebraska
Nevada New Hampshire New Jersey New York
North Carolina North Dakota Ohio Oklahoma
Oregon Pennsylvania Puerto Rico Rhode Island
Tennessee Texas Utah Vermont
Virginia Washington West Virginia Wisconsin

Regulations require the licensing of life settlement brokers and providers and stipulate adhering to state and federal privacy laws, as well as submitting anti-fraud plans for approval to ensure that policies they purchase have not already been purchased. 


The Importance of Disclosures

Life settlements are one of the most highly transparent transactions in the insurance industry. Their regulations mainly focus on disclosures. State governments encourage full transparency to educate policyholders about their options. In most states, this means requiring policyholders to see all offers and counteroffers and providing documents that explain that life settlements may affect their tax liability and eligibility for government assistance. It also includes letting policyholders know alternatives to settlements. 
The most essential disclosure is requiring insurance companies to let eligible policyholders know that they can sell their option instead of surrendering it. In fact, these six states make it mandatory for insurance companies to let policyholders thinking about a lapse or surrender know that they can sell their life insurance:

  • Kentucky

  • New Hampshire

  • Washington

  • Maine
  • Oregon
  • Wisconsin

This brings us back to our first point that only 50% of Americans are aware of this option, and it’s critically important to educate policyholders as a fiduciary duty.


Waiting Periods for Selling a Life Insurance Policy

Another important regulation is waiting periods. To protect insurance companies, many states have mandated a waiting period (usually two years) from the time a policyholder purchases a life insurance policy until the time they sell it, thus deterring those who might buy with the intent just to sell. It varies by state, but here are the waiting periods:

Two-Year Waiting Period                 

Four-Year Waiting Period

Five-Year Waiting Period

  • California

  • Arizona

  • Utah

  • Idaho

  • Washington

  • Montana

  • Kansas

  • Oklahoma

  • Texas

  • Arkansas

  • Illinois

  • Indiana

  • Kentucky

  • Tennessee

  • Florida

  • Georgia

  • New York

  • Connecticut

  • Rhode Island

  • Massachusetts

  • Maine

  • Puerto Rico

  • Hawaii

  • Minnesota

  • Oregon

  • Nevada

  • North Dakota

  • Nebraska

  • Iowa

  • Wisconsin

  • Ohio

  • West Virginia

  • Delaware

  • New Hampshire

  • Vermont

It’s important to stay on top of these regulations since they do change. As a LISA member, you have the tools and the network to provide the best service for your clients. Check out our resource section and stay abreast of current blogs for the latest in life insurance and viatical settlement industry trends and information. No matter what state/s you work in, we have you covered.