New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on April 27, 2004, representing the position of the New York State Insurance Department.

RE: Securitization of Viatical Settlements

Question Presented:

Is a firm that will purchase viatical settlements from licensed viatical settlement companies, some of which may be based on the lives of New York residents, aggregate a number of policies into a package, and sell interests in the package to investors, some of whom may be New York residents, required to be licensed as a viatical settlement company?

Conclusion:

Pursuant to New York Insurance Law § 7808(e) (McKinney 2000), such a firm must be licensed as a viatical settlement company if it will purchase viatical settlements on New York residents.

Facts:

The inquirer’s client has established a trust which will purchase viatical settlements from viatical settlement companies that are licensed as such in the jurisdictions where the viators resided at the time of viatication of the life insurance policy. Some of the viators may have been New York residents at the time of viatication.

The trust will fund the purchases of settlements through an arrangement entered into with a financing facility. Payment of premiums for the viaticated policies will be made through a "premium facility", which will have a security interest in each policy until the death of the viator.

The inquirer’s client will aggregate the policies held by the trust into a package and sell interests in the trust to investors, some of whom may be New York residents. The investors will purchase an interest representing a stated percentage of all settlements held by the trust. As settlements mature, i.e. the viator dies and the life insurance company makes payment on the underlying policy, the investor will receive his or her aliquot share of the policy proceeds, less any amounts (plus interest) advanced by the premium facility to keep the policy in force.

In order to offer some liquidity to the potential investor, 30 days prior to the second or subsequent anniversary of the closing of the offering of interests in the trust, an investor may sell his or her interest in the trust to a liquidity facility in consideration of receipt of the original investment amount, less any amounts received in respect of maturation of a settlement. No more than 10% of the investment amount may be liquidated in any one year.

In addition, if at the end of a five year period after closing of the offering on interests in the trust, one or more settlements have not matured, the trustee will use its best efforts to determine the fair market value in the secondary market of any settlements that have not yet matured. The results of this valuation will be presented to the investors, who will vote as to whether to utilize this "optional exit strategy". If at least 75% of the investment interests, not individual investors, approve the resale, the trustee will use its best efforts to complete the resale at the valuation presented. The inquirer’s client or an affiliate may be the purchaser of the resold settlements, but has no obligation to purchase any settlement so offered. Upon completion of the resale, the net proceeds will be distributed to the investors on a pro rata basis.

Analysis:

Viatical settlement company, viator, and viatical settlement are defined in New York Insurance Law § 7801 (McKinney 2000):

(a) ‘Viatical settlement company’ means an individual, partnership, corporation or other entity not prohibited from acting as a viatical settlement company . . . that enters into an agreement with a person owning a life insurance policy insuring the life of a person who has a catastrophic or life threatening illness or condition, under the terms of which the viatical settlement company pays compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the policyowner's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company…

(b) ‘Viator’ means the owner of a life insurance policy insuring the life of a person who has a catastrophic or life threatening illness or condition, who enters into an agreement under which the viatical settlement company will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy, in return for the viator's assignment, transfer, sale, devise or bequest of the death benefit or ownership of the insurance policy to the viatical settlement company…

(c) ‘Viatical settlement’ means an agreement entered into between a viatical settlement company and a viator…

Among the general rules applicable to viatical settlement companies operating in New York is the restriction set forth in New York Insurance Law § 7808(e):

Viatical settlement companies shall not enter into any agreement or communication with any other viatical settlement company with respect to the terms to be offered to a viator except that a viatical settlement company may assign such settlement or insurance policy only to another viatical settlement company licensed pursuant to this article. (Emphasis added)

Should the trust purchase viatical settlements from other viatical settlement companies arising from life insurance policies on individuals who were New York residents at the time of viatication, in accordance with New York Insurance Law § 7808(e), such purchase could not be effectuated unless the trust were licensed as a viatical settlement company. However, the offering of investment interests in viatical settlements to New York residents would not require the licensing of your client as a viatical settlement company, nor would such offerings constitute an assignment by the trust within the meaning of New York Insurance Law § 7808(e).

This opinion is limited to the effect of the New York Insurance Law (McKinney 2000 and 2004 Supplement) on the transactions in issue. Should you have any questions regarding New York requirements involving the sale of such interests to New York investors, your questions should be addressed to:

Investor Protection Bureau
Department of Law
120 Broadway
New York, NY 10271-0332.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.