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15.5 Life Insurance Basics

Insurable Interest​

An employer, or an employer-sponsored trust established for the benefit of employees, has an insurable interest in the lives of its employees, directors, and retired employees. For non-management employees and retired employees, the employer’s insurable interest is limited to the amount of the aggregate projected gross liabilities associated with the employee benefit plans.

A married individual has an insurable interest in the life of their spouse and may obtain life insurance coverage on the spouse’s life.

Viatical Settlements​

Viator​

A viator is the owner of a life insurance policy or a certificate holder under a group policy who, in exchange for compensation or something of value that is less than the expected death benefit, assigns, transfers, sells, or relinquishes ownership rights or death benefits under the policy. The term is not limited to policyowners who insure individuals that are terminally or chronically ill.

Viatical Settlement Broker​

A viatical settlement broker is a person who, on behalf of a viator and in exchange for a fee, commission, or other valuable consideration, offers or attempts to negotiate viatical settlement contracts between a viator and one or more viatical settlement providers or brokers. Regardless of the method of compensation, the broker represents only the viator and owes the viator a fiduciary duty to act in accordance with the viator’s instructions and best interests.

Viatical Settlement Provider​

A viatical settlement provider is a person or entity, other than the viator, that enters into or carries out a viatical settlement contract.

Before entering into a viatical settlement contract, a viatical settlement provider must obtain all of the following:

  • If the viator is also the insured, a written statement from the attending physician confirming that the viator is of sound mind and is not acting under constraint or undue influence in entering into the viatical settlement contract.
  • A written authorization from the insured consenting to the release of medical records to the viatical settlement provider or broker and to the insurer that issued the policy covering the insured’s life.

A viatical settlement provider must provide written notice to the insurer that issued the policy indicating that the policy has become, or will become, a viaticated policy. This notice must be provided within 20 days after the viator executes documents transferring any rights under the policy, or within 20 days after entering into any express or implied agreement, option, promise, or other arrangement to viaticate the policy.

Viatical Settlement Contract – Right to Rescind After Receipt of Proceeds​

A viatical settlement contract is a written agreement between a viator and a viatical settlement provider that sets forth the terms under which the viator receives compensation or something of value that is less than the expected death benefit of the policy in exchange for assigning, transferring, selling, or relinquishing ownership rights or benefits under the policy. Viatical settlement contracts include, but are not limited to, life settlement contracts and senior settlement contracts.

Every viatical settlement contract must provide the viator with an unconditional right to rescind the contract for at least 15 calendar days after receiving the viatical settlement proceeds. If the insured dies during the rescission period, the contract is automatically considered rescinded, provided that all viatical settlement proceeds are repaid to the viatical settlement provider. When a viatical settlement contract is rescinded, ownership of the insurance policy or certificate returns to the viator, or to the viator’s estate if the viator is deceased, regardless of any transfer of ownership made by the viator, the viatical settlement provider, or any other party.

Stranger Originated Life Insurance (STOLI)​

Stranger-originated life insurance (STOLI) refers to a practice, arrangement, or agreement established at or before the issuance of a life insurance policy in which the policy is purchased for the benefit of one or more persons who do not have an insurable interest in the insured. The arrangement also involves the transfer of ownership rights or policy benefits at any point in time. STOLI arrangements do not include lawful viatical settlement transactions.

Any insurer issuing life insurance policies in Ohio must include questions in its life insurance applications that are designed to identify and prevent stranger-originated life insurance (STOLI) transactions. An insurer that uses multiple policy forms is not required to use identical STOLI-related questions on every application. The questions may differ depending on the type of product, the amount of insurance applied for, and the likelihood that the policy could involve a STOLI arrangement. In addition, insurers must electronically file an annual report describing the measures implemented to detect and prevent STOLI transactions.

Any stranger-originated life insurance (STOLI) act, practice, agreement, contract, or transaction is considered void and unenforceable. Engaging in a STOLI transaction constitutes an unfair and deceptive trade practice under the law.

Viatical Settlement Broker Authority and Licensing​

A viatical settlement broker or provider may not conduct business in this state without first obtaining a license from the Superintendent of Insurance. If the policyowner is not a resident of Ohio, the viatical settlement provider must also be licensed in the policyowner’s state of residence when that state requires such licensure.

If a policy has more than one owner and the owners reside in different states, the viatical settlement contract will be governed by the laws of the state in which the owner holding the largest ownership interest resides. If the owners have equal ownership interests, they must mutually select and agree upon the state whose laws will govern the contract.

An individual insurance agent who is in good standing and has been licensed in Ohio as either a resident or nonresident agent with a life line of authority for at least five years may act as a viatical settlement broker without obtaining a separate viatical settlement broker license, provided the viatical settlement activities are incidental to the agent’s insurance business activities.

A licensed attorney, certified public accountant (CPA), or financial planner accredited by a nationally recognized organization may negotiate viatical settlement contracts on behalf of a viator without obtaining a viatical settlement broker license, provided they do not receive direct or indirect compensation from the viatical settlement provider or purchaser.

An applicant seeking licensure must submit a completed application along with the required licensing fee. The Superintendent will conduct an investigation and may issue the license if the applicant provides:

  • A detailed plan of operation
  • Proof of financial responsibility
  • A general explanation of the methods used to determine life expectancies
  • A written plan outlining the policies and procedures used in determining life expectancies

Any corporation, partnership, or other business entity licensed as a viatical settlement broker must designate at least one individual who is separately licensed as a viatical settlement broker to oversee and ensure the entity’s compliance with applicable laws and regulations.

A viatical settlement license renews on March 31 of the year following its issuance and on March 31 each year thereafter. The license will expire if the required renewal fee is not paid by the renewal date. In addition, a viatical settlement broker must complete at least 15 hours of continuing education (CE) every two years.

Disciplinary Actions​

The Superintendent may refuse to issue a license, or may suspend, revoke, or refuse to renew the license of a viatical settlement provider or broker for any of the following reasons:

  • A material misrepresentation was made in the license application.
  • The licensee, as a viatical settlement provider, has demonstrated a pattern of making unreasonable payments to viators.
  • The licensee, as a viatical settlement provider, used an unapproved contract form.
  • The licensee, as a viatical settlement provider, failed to fulfill contractual obligations under a viatical settlement contract.
  • The licensee no longer satisfies the qualifications required for original licensure.
  • The licensee, as a viatical settlement provider, assigned, transferred, or pledged a viaticated policy to a person the provider knew was not properly licensed as a viatical settlement provider in the state or was not a viatical settlement purchaser.
  • The applicant or licensee has been convicted of fraudulent or dishonest acts, has been subject to a final administrative action in another state, has been involved in an administrative or civil action brought by the Department of Commerce or Division of Securities, or has pleaded guilty or no contest to a felony or to a misdemeanor involving fraud, moral turpitude, or breach of trust.

Before taking any disciplinary action, the Superintendent must provide the affected party with notice and an opportunity for a hearing.

Promoting Purchase for Purpose of Selling​

It is prohibited for any person to enter into a viatical settlement contract before the life insurance policy that is the subject of the settlement has been applied for or issued. It is also prohibited for any person to issue, solicit, market, or promote a life insurance policy primarily for the purpose of selling the policy through a viatical settlement transaction.

A person may not enter into a viatical settlement contract during the five-year period beginning on the date the policy was issued unless the viator certifies to the viatical settlement provider that one or more of the following conditions occurred within five years after the policy’s issuance:

  • The policy was issued as the result of the viator exercising conversion rights from a group policy, provided the combined period of coverage under both the prior policy and the converted policy equals at least 60 months.
  • The viator is a charitable organization that has an insurable interest in the policy and is recognized by the IRS as exempt from federal income taxation.
  • The viator certifies and provides independent evidence to the viatical settlement provider showing that one or more of the following events occurred after the policy was issued:
    • The viator or insured becomes terminally or chronically ill.
    • The viator’s spouse dies.
    • The viator divorces their spouse.
    • The viator retires from full-time employment.
    • The viator becomes physically or mentally disabled, and a physician determines that the disability prevents the viator from maintaining full-time employment.
    • A court declares the viator bankrupt or insolvent.
    • The sole beneficiary of the policy is a family member of the viator and that beneficiary dies.
  • The viator enters into a viatical settlement contract more than two years after the policy was issued and certifies that all of the following statements are true:
    • The policy was funded using the viator’s personal assets.
    • The viator had no agreement, arrangement, or understanding with any other person to viaticate the policy or transfer the policy benefits.
    • If requested by the insurer, the viator disclosed whether any person other than the insurer obtained a life expectancy evaluation for settlement purposes related to the policy and provided the insurer with a copy of that evaluation.
    • Prior to the issuance of the policy, the viator disclosed to the insurer any financial arrangement, trust, transaction, or other device intended to conceal the ownership or beneficial interest in the policy.

Advertising​

The purpose of viatical settlement advertising regulations is to ensure that prospective viators receive clear, accurate, and unambiguous information, along with truthful and adequate disclosure of the benefits, risks, limitations, and exclusions associated with viatical settlement contracts. These advertising standards are designed to ensure that product descriptions are presented in a manner that prevents unfair, deceptive, or misleading advertising practices. The regulations apply to all advertising of viatical settlement products intended for distribution in this state, including internet advertisements viewed by individuals located within the state.

Every licensee must establish and continuously maintain a system to oversee and control the content, format, and method of distribution of all advertisements. All advertisements, regardless of who prepares, designs, creates, or presents them, are the responsibility of both the licensee and the individual or entity that created or presented the advertisement.

All viatical settlement advertisements must clearly disclose the name of the viatical settlement provider. If a specific viatical settlement contract is advertised, the advertisement must identify the contract by form number or by another appropriate description.

If an advertisement emphasizes how quickly a viatical settlement can be completed, the advertisement must disclose the average time required to complete the viatication process. If the advertisement highlights the amount of money available to viators, it must also disclose the average purchase price paid to viators during the previous six months, expressed as a percentage of the policy’s face value.

Viatical settlement advertisements may not:

  • Minimize, obscure, or present in an ambiguous manner any information that is required to be disclosed.
  • Use the name or title of a life insurance company or policy without the approval of that company.
  • State or imply that premium payments will not be required to keep the policy in force unless that statement is accurate.
  • Represent that interest charged on an accelerated death benefit or policy loan is unfair, inequitable, or otherwise improper.
  • Use terms such as “free,” “no cost,” “without cost,” “no additional cost,” “at no extra cost,” or similar language unless the statement is truthful.
  • Use statistical information unless it accurately reflects current and relevant facts.
  • Disparage any insurer, viatical settlement provider, viatical settlement broker, insurance product, service, or marketing method.
  • Mislead prospective viators into believing that the advertisement is connected with or endorsed by any government program or governmental agency.

If testimonials, appraisals, analyses, or endorsements are used in viatical settlement advertising, they must:

  • Be genuine and authentic.
  • Reflect the current opinion of the person providing the statement.
  • Relate directly to the viatical settlement product or service being advertised.
  • Be reproduced accurately and with enough completeness to avoid misleading or deceiving prospective viators.
  • Clearly disclose any direct or indirect financial interest the individual has in the subject of the testimonial.
  • Clearly disclose any financial compensation or benefit received by the person providing the testimonial.
  • Disclose the relationship between the viatical settlement provider and any organization or group expressing approval or endorsement in the advertisement.

False or misleading advertisements are prohibited. Examples of prohibited representations include, but are not limited to, the following:

  • Statements such as “guaranteed,” “fully secured,” “100 percent secured,” “fully insured,” “secure,” “safe,” “backed by rated insurance companies,” “backed by federal law,” “backed by state law,” or “state guaranty funds.”
  • Claims such as “no risk,” “minimal risk,” “low risk,” “no speculation,” or “no fluctuation.”
  • Statements indicating that a product is “qualified or approved” for IRAs, Roth IRAs, 401(k) plans, SEPs, 403(b) plans, Keogh plans, TSA plans, or other retirement account rollovers, or descriptions such as “tax deferred,” when presented in a misleading manner.
  • Use of the word “guaranteed” to describe returns, principal, earnings, profits, or investments.
  • Claims that there are “no sales charges or fees.”
  • Descriptions such as “high yield,” “superior return,” “excellent return,” “high return,” or “quick profit.”
  • Favorable statements or testimonials regarding viatical settlement contracts or viatical settlement purchase agreements used out of context from newspapers, trade publications, journals, radio or television programs, or other print or electronic media sources.

Agent Responsibilities​

Solicitation, Sales Presentations, and Disclosure Requirements​

A life insurance policy must include the words “life insurance” in its title unless other language accompanying the title clearly identifies the contract as a life insurance policy.

Standards​

The following standards apply to all advertisements, illustrations, and sales presentations:

  • Policies offering a pure guaranteed annual endowment must clearly distinguish the gross premiums and endowment benefit amounts from the life insurance benefits.
  • The annual endowment benefit must be stated as a dollar amount rather than as a percentage of premium.
  • Dividends may only be described as surplus resulting from the insurer’s actual yearly experience with mortality, investment earnings, and administrative expenses.
  • Dividends may be described as tax-free only to the extent that they represent a return of premium.
  • Dividends may not be portrayed as likely to increase based solely on historical growth trends unless the presentation also discloses any past reductions or periods in which dividends were not paid.
  • Dividends may not be portrayed as making a policy “self-supporting” or as guaranteeing future policy benefits.
  • Terms such as “investment,” “investment plan,” “expansion plan,” “profit,” “profits,” “profit sharing,” or similar language may not be used in a misleading manner that suggests the purchaser is buying something other than a life insurance policy or annuity contract.
  • Prospects or policyholders may not be referred to as “partners” unless they have been informed that they do not possess the legal rights of a partner under statutory or common law.
  • Advertisements and sales presentations may not include statements that create the impression that a person is purchasing stock in a company or becoming an investor, rather than simply purchasing life insurance.
  • Advertisements and sales presentations may not suggest that purchasing a policy will make the purchaser part of a select or limited group entitled to special advantages or preferential treatment regarding dividend payments.
  • References to the growth or earnings of an insurer’s parent company or affiliate may not be used unless the advertisement clearly explains that the parent or affiliate is not the life insurance company issuing the policy being offered for sale. Example: If a policy is being sold by Company A, which is owned by the financially successful Company Z, any reference to Company Z must clearly disclose that the policy is issued by Company A and not by Company Z.
  • Death benefits may not be described as being provided “in lieu of profits.”
  • The sale of policies may not be falsely represented as being limited to shareholders only.
  • Premium payments may not be referred to as “deposits” unless the payment creates a debtor-creditor relationship between the insurer and the policyholder.
  • Illustrations may not project future dividends unless they clearly disclose that the dividends illustrated are not guaranteed.
  • Benefits may not be presented as guaranteed if the policy could lapse, unless the advertisement also explains the applicable nonforfeiture benefits.
  • Sales kits and prepared sales presentations must clearly and unmistakably state that the solicitation involves life insurance.
  • Dollar amounts may not be used unless the source of the figures and the subject matter to which they relate are clearly identified. Example: If an illustration uses dollar amounts to demonstrate the amount a policyholder may receive, it must also clearly show, in dollar amounts, the amount the policyholder is required to pay.
  • Producers may not make broad statements suggesting that insurance companies profit from policy lapses or policy surrenders.
  • Any unfavorable experience other insurers have had with policies that are similar to the policy being offered must be disclosed.
  • Policy features may not be falsely represented as being exclusive to a particular insurer’s policies.
  • Future purchase options may not be presented as though they are already active or in effect.
  • A policy may not be marketed or solicited as a “now or never” opportunity.

Backdating of Policies​

In Ohio, a life insurance company or agent may not issue or deliver a policy or contract with an effective date that is more than six months prior to the date of the application. This practice is referred to as backdating for the purpose of saving or preserving the insured’s age.

Illustrations​

Insurers must inform the Superintendent whether a policy form will be marketed with illustrations or without illustrations, and all marketing activities must be consistent with that designation. If an insurer designates a policy form as one that will be marketed without illustrations, the insurer may not use an illustration for any policy issued under that form before the policy’s first anniversary.

If an insurer designates a policy form as one that will be marketed with an illustration, a basic illustration that complies with the regulation must be provided. The illustration must be clearly identified as a “life insurance illustration” and include the following information:

  • The proposed insured’s name, age, and sex
  • The name of the insurer
  • The name and business address of the agent
  • The underwriting classification and/or rating category on which the illustration is based
  • The generic name of the policy, the insurer’s product name if different, and the policy form number
  • The dividend option selected or the use of non-guaranteed elements
  • The initial death benefit

When using an illustration in the sale of a life insurance policy, the following practices are prohibited:

  • Presenting the policy as anything other than a life insurance policy.
  • Misrepresenting the non-guaranteed elements of the contract.
  • Stating or implying that non-guaranteed elements are guaranteed in amount or payment.
  • Using an illustration that portrays policy performance more favorably than the insurer’s current illustrated scale.
  • Providing an applicant with an incomplete illustration.
  • Representing that premium payments will not be required each year unless that statement is accurate.
  • Using the terms “vanish,” “vanishing premium,” or similar terminology.
  • Except for policies that can never accumulate nonforfeiture values, using an illustration that is “lapse-supported” or not “self-supporting.”

The illustration regulations apply to both individual and group life insurance policies and certificates, with the following exceptions:

  • Variable life insurance policies
  • Individual and group annuity contracts
  • Credit life insurance policies
  • Life insurance policies in which the illustrated death benefit on any individual does not exceed $10,000

Basic Illustrations​

The following standards apply to all basic illustrations:

  • The illustration must clearly display the date on which it was prepared.
  • Each page must be numbered and indicate its relationship to the total number of pages (for example, “Page 4 of 7”).
  • The assumed dates for premium payment receipt and benefit payout within a policy year must be clearly identified.
  • Guaranteed death benefits and guaranteed values must be clearly labeled as guaranteed.
  • Any non-guaranteed elements must be clearly identified as non-guaranteed.
    • Guaranteed elements must be presented before the corresponding non-guaranteed elements.
  • If the policy’s accumulation value is shown, it must appear near the corresponding surrender value available under the policy.
  • Policy benefits and values may be presented in graphic or chart form in addition to a tabular format.

A basic illustration must include a narrative summary that provides the following information:

  • A brief description of the policy, including a statement that the product is a life insurance policy.
  • A brief explanation of the premium outlay required under the policy.
  • A brief description of any policy features, riders, or options—whether guaranteed or non-guaranteed—and an explanation of how they may affect policy benefits and values.
  • Identification and brief definitions of the column headings and key terms used in the illustration.
  • A statement substantially similar to the following: “This illustration assumes that the currently illustrated non-guaranteed elements will remain unchanged for all years shown. This is unlikely to occur, and actual results may be more or less favorable than those illustrated.”

Numeric Summary: A basic illustration must also contain a numeric summary showing the policy’s death benefits, policy values, and premium outlay for at least policy years 5, 10, and 20, as well as at the insured’s age 70.

Statements: Statements substantially similar to the following must appear on the same page as the numeric summary and must be signed by the applicant, or by the policyowner when the illustration is provided at the time of policy delivery.

A statement, signed and dated by the applicant or policyowner, substantially similar to the following must be included: “I have received a copy of this illustration and understand that any non-guaranteed elements shown in the illustration are subject to change and may be higher or lower than illustrated. The agent has informed me that these elements are not guaranteed.”

A statement, signed and dated by the insurance agent or another authorized representative of the insurer, substantially similar to the following must be included: “I certify that this illustration was presented to the applicant and that I explained that any non-guaranteed elements shown are subject to change. I have not made any statements that are inconsistent with the illustration.”

Supplemental Illustrations​

A supplemental illustration may be provided if all of the following conditions are met:

  • The supplemental illustration is attached to, accompanies, or is preceded by a basic illustration.
  • The non-guaranteed elements shown in the supplemental illustration are not more favorable than the corresponding non-guaranteed elements used in the basic illustration.
  • The supplemental illustration includes the same disclosure required in a basic illustration stating that non-guaranteed elements are not guaranteed.

Supplemental illustrations must contain a notice directing the reader to the basic illustration for guaranteed elements and other important policy information.

Illustration Delivery and Record Retention​

If a basic illustration is used in the sale of a policy and the application is submitted as illustrated, a signed copy of the illustration must accompany the application and be provided to the applicant. If the policy is issued differently from the way it was originally illustrated, the insurer must provide a revised basic illustration that reflects the policy as issued. The revised illustration must accompany the policy and be clearly labeled “Revised Illustration.”

If no illustration is used in the sale of the policy, or if the policy is applied for other than as illustrated, the agent must provide written certification of that fact. The applicant must also acknowledge, on the same document, that no illustration was provided at the time of sale and that an illustration will be provided no later than the time the policy is delivered.

The insurer must retain a signed copy of the illustration or certification until three years after the policy is no longer in force. However, if no policy is issued, the insurer is not required to retain a copy.

Policy Summary​

A Policy Summary is a written statement that describes the key features and elements of a life insurance policy, including, but not limited to, the following:

  • A prominently displayed title stating: “STATEMENT OF POLICY COST AND BENEFIT INFORMATION.”
  • The name and address of the insurance agent, or, if no agent is involved, a statement explaining the procedure for obtaining responses to questions about the policy.
  • The full name and the home office or administrative office address of the insurer issuing the life insurance policy.
  • The generic name of the basic policy and each rider attached to the policy. The following amounts, when applicable, must be shown for the first five policy years and for representative policy years thereafter in order to clearly illustrate premium and benefit patterns. These years must include, at a minimum, the years used for cost comparison indexes and the earlier of either policy maturity or at least one attained age between 60 and 65:
    • The guaranteed annual premium for the basic policy.
    • The guaranteed annual premium for each optional rider.
    • The guaranteed death benefit payable at the beginning of the policy year, regardless of cause of death except for suicide or other specifically stated exclusions, provided by the basic policy and each optional rider, with the benefits shown separately for the base policy and each rider.
    • The guaranteed total cash surrender values at the end of each year, shown separately for the basic policy and each rider.
    • Any guaranteed endowment benefits payable under the policy that are not already included in the cash surrender values.
  • If the policy includes a policy loan provision, the effective annual percentage interest rate for policy loans must be disclosed, including whether the interest is charged in advance or in arrears. If the policy loan interest rate is adjustable, the policy summary must also state that the insurer will determine the annual percentage rate in accordance with the policy provisions and applicable law.
  • Cost comparison indexes for 10-year and 20-year periods must be provided, but not beyond the premium-paying period. Separate indexes must be shown for the basic policy and for each optional term life insurance rider. These indexes are not required for optional riders that provide only limited benefits, such as accidental death benefits, waiver of premium for disability, preliminary term coverage of less than 12 months, guaranteed insurability benefits, or for policies and riders covering more than one life.
  • The following statement must appear near the cost comparison indexes: “An explanation of the intended use of these indexes is provided in the Life Insurance Buyer’s Guide.”
  • The policy summary must also include the date on which it was prepared.

The policy summary must be provided as a separate document. All required disclosures must be presented clearly and in a manner that does not minimize, obscure, or hide any information. Amounts that remain unchanged for two or more policy years may be shown as a single figure, provided it is clearly indicated which policy years the amount applies to. Amounts shown for the first five policy years must be expressed as total amounts rather than on a per-thousand or per-unit basis. If a policy or rider covers more than one insured, the death benefits must be displayed separately for each insured or for each class of insureds when benefits are identical within that class. Any zero values must be shown as “0” and may not be left blank.

Buyer’s Guide​

The Buyer’s Guide is a document containing only the current version of the buyer’s guide recommended by the NAIC. An insurer must begin using the updated Buyer’s Guide no later than six months after it has been approved by the NAIC.

Duties of Insurers​

The insurer must provide every prospective purchaser with a Buyer’s Guide and a policy summary before accepting the applicant’s initial premium payment or premium deposit.

If an illustration is used in the sale of a policy, a separate policy summary is not required. If the policy being applied for includes an unconditional refund provision (free-look period) of at least 10 days, the Buyer’s Guide and policy summary must be delivered before or at the time the policy is delivered.

Replacement​

A replacement is any transaction in which a new life insurance policy is purchased and, as part of the transaction, an existing policy is:

  • Lapsed, forfeited, surrendered, or otherwise terminated
  • Modified to reduce the benefits or shorten the term of the existing coverage
  • Reissued with a reduced cash value
  • Converted to reduced paid-up insurance, continued as extended term insurance, or reduced in value through the use of nonforfeiture benefits or other policy values
  • Used as part of a financed purchase arrangement

The following types of policies and transactions are exempt from replacement regulations:

  • Credit life insurance
  • Group life insurance policies or annuity contracts
  • Changes or conversion privileges exercised within an existing policy
  • Policies issued by the same insurer that issued the existing policy
  • Existing nonconvertible term life insurance policies that will expire within five years or less and cannot be renewed
  • Immediate annuities purchased using proceeds from an existing contract
  • Structured settlement arrangements

Conservation refers to any effort by the existing insurer or agent to maintain an existing policy in force when a replacement transaction is being considered.

Duties of Producers​

A producer who initiates an application must provide the insurer with a statement signed by both the applicant and the producer indicating whether the applicant currently has existing policies or contracts. If the applicant answers “no,” the producer has fulfilled all replacement-related duties.

If the answer is “yes,” the producer must provide the applicant with a Notice of Replacement. The notice must be signed by both the applicant and the producer and must certify either that the producer read the notice aloud or that the applicant declined to have it read aloud. A copy of the notice must also be provided to the applicant.

The Notice of Replacement must disclose whether each existing policy or contract will be replaced or whether an existing policy will be used to finance the purchase of the new policy or contract.

Duties of Replacing Insurers​

The replacing insurer is required to:

  • Notify any insurer that may be affected by a proposed replacement within 5 business days after receiving a completed application indicating replacement. If the existing insurer requests a copy of the proposed replacement policy or related disclosure documents, the replacing insurer must provide them within 5 business days.
  • Retain copies of the Notice of Replacement for at least 5 years or until the next regular insurance department examination, whichever occurs later.
  • Provide the policyowner with notice of the right to return the policy within 30 days after delivery and receive a full, unconditional refund of all premiums or other consideration paid for the policy.

Duties of Existing Insurers​

The existing insurer is required to:

  • Retain all replacement notices received for at least 5 years or until the completion of the next regular examination conducted by the insurance department, whichever is later.
  • Within 5 business days after receiving notice that a policy is being replaced, send the policyowner a letter informing them of their right to obtain information regarding the existing policy or contract values, including an in-force illustration or policy summary.
  • When receiving a request to borrow, surrender, or withdraw policy values, provide notice to the policyowner explaining that the release of those values may impact the policy’s guaranteed elements, non-guaranteed elements, face amount, or surrender value.

Quiz​

1. Which of the following best describes a viator?

A. An insurance company issuing a life insurance policy

B. A person who purchases a viaticated policy from an investor

C. The owner of a life insurance policy who transfers ownership or benefits for compensation less than the expected death benefit

D. A producer who markets life insurance policies

Correct Answer: C

Rationale: A viator is the owner of a life insurance policy or certificate holder who assigns, transfers, sells, or releases policy ownership or death benefits in exchange for compensation that is less than the expected death benefit.

2. Which of the following is TRUE regarding stranger-originated life insurance (STOLI)?

A. STOLI arrangements are encouraged if the policy has high cash value

B. STOLI transactions are considered lawful investment arrangements

C. STOLI applies only to group life insurance policies

D. STOLI arrangements are void, unenforceable, and considered unfair and deceptive trade practices

Correct Answer: D

Rationale: STOLI arrangements involve policies benefiting individuals without insurable interest and are considered void, unenforceable, and unfair or deceptive trade practices.

3. A viatical settlement broker represents which party in a viatical settlement transaction?

A. The insurer

B. The viator

C. The Superintendent of Insurance

D. The policy beneficiary

Correct Answer: B

Rationale: A viatical settlement broker represents only the viator and owes the viator a fiduciary duty to act according to the viator’s instructions and best interests.

4. Which of the following is required before a viatical settlement provider may enter into a viatical settlement contract when the viator is also the insured?

A. Approval from the policy beneficiary

B. Written consent from the Superintendent of Insurance

C. A written statement from the attending physician confirming the viator is of sound mind and not under undue influence

D. A court order approving the transaction

Correct Answer: C

Rationale: Before entering into the contract, the provider must obtain a written statement from the attending physician verifying the viator is of sound mind and not acting under constraint or undue influence.

5. Which of the following is exempt from life insurance replacement regulations?

A. A financed purchase arrangement

B. A policy converted to reduced paid-up insurance

C. Group life insurance policies or annuity contracts

D. A policy surrendered to purchase new coverage

Correct Answer: C

Rationale: Group life insurance policies and annuity contracts are specifically exempt from replacement regulations.