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

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 10-02-01

The Office of General Counsel issued the following opinion on February 9, 2010, representing the position of the New York State Insurance Department.

Re: Selling and Assigning a Beneficial Interest in a Trust that Owns Life Insurance Policies

Questions Presented:

1. Does current Article 78 of the Insurance Law (McKinney Supp. 2009) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 380 (2004) (Regulation 148) apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who has a catastrophic or life-threatening illness or condition?

2. Does the Insurance Law and regulations promulgated thereunder currently apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who does not have a catastrophic or life threatening illness or condition?

Conclusions:

1. No. Current Article 78 of the Insurance Law and Regulation 148 do not apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who has a catastrophic or life-threatening illness or condition, because the sale and assignment of the beneficial interest in the trust is not a viatical settlement.

2. No. The Insurance Law and regulations promulgated thereunder currently do not apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who does not have a catastrophic or life threatening illness or condition.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

As a preliminary matter, the inquiry pertains to the current Insurance Law and regulations promulgated thereunder, including Article 78 and Regulation 148. On November 19, 2009, Governor David A. Paterson signed into law Chapter 499 of the Laws of 2009, which repeals Article 78 of the Insurance Law and adds a new Article 78 entitled, “Life Settlements.” 1 Chapter 499 is effective May 18, 2010, with the exception of new Insurance Law §§ 7810, 7811, and 7815, which apply to privacy, disclosures to owners and insureds, and stranger-originated life insurance (“STOLI”), respectively, and which took effect on November 19, 2009. However, the analysis below addresses only current Article 78 and Regulation 148. This opinion does not address changes to the Insurance Law under Chapter 499 of the Laws of 2009.

1. Trust that owns assets that include a life insurance policy on the life of an insured who has a catastrophic or life-threatening illness or condition

The inquirer asks whether Article 78 of the Insurance Law and Regulation 148 apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who has a catastrophic or life-threatening illness or condition. At present, both Article 78 of the Insurance Law and Regulation 148 apply to viatical settlements. Current Insurance Law § 7801(c) defines a “viatical settlement” as “an agreement entered into between a viatical settlement company and a viator.” Current Insurance Law § 7801(a) defines “viatical settlement company” in relevant part as:

an individual, partnership, corporation or other entity not prohibited from acting as a viatical settlement company under section twenty of the public health law 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. Viatical settlement company does not include:

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(3) a friend or family member of the policyowner or of the insured who enters into three or fewer agreements for the transfer of life insurance policies for any value less than the expected death benefit.

Therefore, a viatical settlement company is any person or entity that enters into an agreement with a person who owns a life insurance policy insuring a person with a catastrophic or life-threatening illness or condition for the purpose of obtaining the death benefit or ownership of the policy in exchange for compensation. However, a viatical settlement company does not include a friend or family member of the policy owner or of the insured who enters into three or fewer agreements for the transfer of life insurance policies for any value less than the expected death benefit.

Furthermore, current Insurance Law § 7801(b) defines “viator” as:

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. Viator may also include a person insured under a group life insurance policy who is not prohibited from assigning his or her rights or benefits and who assigns those rights or benefits by a viatical settlement.

As a result, a person must be the owner of a life insurance policy that insures the life of a person who has a catastrophic or life-threatening illness or condition and must enter into an agreement with a viatical settlement company under which the company will pay compensation to the person in exchange for the death benefit or ownership of the policy in order to be a “viator” as defined by Insurance Law § 7801(b).

In the situation presented here, the trust beneficiary wishes to sell and assign to a friend or relative his or her beneficial interest in a trust that owns assets that include a life insurance policy on the life of an insured who has a catastrophic or life-threatening illness or condition. However, the beneficiary is not the owner of the insurance policy; rather, the trust owns the policy. Furthermore, the trust beneficiary wishes to sell and assign his or her beneficial interest in the trust and does not wish to sell and assign the life insurance policy itself. Because the beneficiary of the trust does not own the life insurance policy and does not wish to sell and assign the policy itself, the sale and assignment of the beneficial interest in the trust is not a viatical settlement, and current Article 78 of the Insurance Law and Regulation 148 do not apply.

2. Trust that owns assets that include a life insurance policy on the life of an insured who does not have a catastrophic or life threatening illness or condition

The inquirer also asks whether the Insurance Law and regulations promulgated thereunder currently apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who does not have a catastrophic or life threatening illness or condition.

Unlike the sale of a life insurance policy on the life of an insured who has a catastrophic or life threatening illness or condition, there is nothing in the current Insurance Law or regulations promulgated thereunder that addresses the sale of a life insurance policy on the life of an insured who does not have such an illness or condition, with the exception of new Insurance Law §§ 7810, 7811, and 7815, because Chapter 499 of the Laws of 2009 generally takes effect on May 18, 2010. As such, the current Insurance Law and regulations promulgated thereunder do not apply when a person, who is a beneficiary of a trust, wishes to sell and assign his or her beneficial interest in the trust to a friend or relative, and the trust owns assets that include a life insurance policy on the life of an insured who does not have a catastrophic or life threatening illness or condition.

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City office.

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1 New Insurance Law § 7802(k) generally defines “life settlement contract” as “an agreement establishing the terms under which compensation is provided to an owner, which compensation is less than the expected death benefit of the policy, in return for the assignment, transfer, sale, release, devise or bequest of any portion of: (A) the death benefit; (B) the ownership of the policy; or (C) any beneficial interest in the policy, or in a trust or any other entity that owns the policy, where a primary purpose of the transaction is to acquire the policy.”