Confused about life settlements? You’re not alone. More than half of Americans aren’t familiar with the concept of selling life insurance through a life settlement or viatical settlement. That’s an unfortunate statistic, given that life and viatical settlements can be financially attractive for anyone who has unnecessary or unwanted life insurance. The more common method for dealing with that extra life insurance is to surrender it back to the insurance company — which leaves the policyholder with far less cash than would be available through a life settlement.
Even policyholders who’ve heard of life settlements can be suspicious about the concept. The truth is, life settlements are completely legal and enforceable. They’re also regulated at the state level throughout most of the country. While life settlement fraud may exist, it’s no more prevalent than fraud in other industries. Actually, the bulk of state regulations around life settlements are designed to prevent fraud against policyholders, but also against insurance companies and advisors.
If you’re interested in selling your life insurance, it’s important to understand the nuances of the laws and regulations in your state. Some states regulate only viatical settlements, for example, while other states govern both life and viatical settlements. What follows is an overview of life settlement laws and regulations by state, including key regulatory concepts such as mandatory disclosure and waiting periods.
States Without Life and Viatical Settlement Regulations
Six states in the U.S. have no regulations on life or viatical settlements:
- Alabama
- Hawaii
- Missouri
- South Carolina
- South Dakota
- Wyoming
If you live in Alabama, Hawaii, Missouri, South Carolina, South Dakota, or Wyoming, you can sell a qualified life insurance policy without worrying about waiting periods or other restrictions. You will have to pay taxes on the proceeds, to the extent the life settlement generates more cash than you paid in premiums. You can learn more about life settlement taxes here and viatical settlement taxes here.
States That Only Regulate Viatical Settlements
Michigan and New Mexico regulate viatical settlements, but not life settlements. The main difference between the viatical settlement and the life settlement is the age and health of the policyholder. You can only qualify for a viatical settlement if you are terminally or chronically ill. You’d pursue a life settlement if you are over the age of 65 and have not been diagnosed with chronic or terminal disease.
Note, too, that viatical settlements are often not taxable, while life settlements generally are.
States With Life and Viatical Settlement Regulations
Today, the 42 U.S. states shown below regulate life settlements.
| States That Regulate Life Settlements | ||
| Alaska | Kentucky | North Dakota |
| Arizona | Louisiana | Ohio |
| Arkansas | Maine | Oklahoma |
| California | Maryland | Oregon |
| Colorado | Massachusetts | Pennsylvania |
| Connecticut | Minnesota | Rhode Island |
| Delaware | Mississippi | Tennessee |
| Florida | Montana | Texas |
| Georgia | Nebraska | Utah |
| Idaho | Nevada | Vermont |
| Illinois | New Hampshire | Virginia |
| Indiana | New Jersey | Washington |
| Iowa | New York | West Virginia |
| Kansas | North Carolina | Wisconsin |
Thirty-three of these states have updated their regulations since 2008 — the year life settlements began capturing the attention of federal regulators. Specifically, in 2008, the federal government identified the need to educate and protect consumers who were in pursuing life settlements. In the next year, 2009, an SEC task force was assembled to develop recommendations and best practices for the industry. That task force produced a report in 2010, which defined the industry, the parties involved in a life settlement, how existing securities regulations and state insurance laws apply to life settlements, and recommendations for the SEC’s future role with respect to life settlements.
What Kinds of Laws and Regulations Do States Have Regarding Life Settlements?
Much of the state regulation around life settlements involves disclosures. These are intended to educate policyholders about their options. For example, many states require that policyholders receive all offers and counteroffers, as well as notifications that life settlements may impact tax liability and eligibility for government assistance. But more importantly, some states also mandate that insurance companies tell eligible policyholders they have the option to sell the insurance rather than surrendering it.
This type of disclosure underpinned a 2014 lawsuit in California between Larry Grill and National Life Insurance Co. Grill and his wife, facing rising premium costs on $7 million worth of life insurance, asked their broker for advice. The broker informed them that they could either pay the higher premiums or surrender some of their coverage. The couple chose to surrender $5 million of their coverage back to National Life Insurance. The Grills later learned they could have pursued a life settlement instead. Because their broker didn’t offer the life settlement as a potential solution, the couple filed suit, alleging fraudulent concealment and financial abuse of an elder.
The following six states have mandatory disclosure laws that require insurance companies to inform policyholders who are considering a lapse or surrender that they could pursue a life settlement instead.
- Kentucky
- Maine
- New Hampshire
- Oregon
- Washington
- Wisconsin
Waiting Periods to Sell a Life Insurance Policy Through a Life Settlement By State
While some regulations are in place to protect policyholders, others are in place to protect insurance companies. An example of the latter is the state-mandated waiting period. The waiting period applies to new policies before they can be sold in a life settlement. If the state defines a two-year waiting period, for example, this means the policy must be at least two years old before it is eligible for a life settlement. This prevents policyholders from buying life insurance with the intention of selling it immediately.
As shown in the table below, waiting periods vary by state. Texas laws regarding life settlement mandate a two-year waiting period, for example. This is the most common practice, shared by 21 different states. Minnesota alone has a four-year waiting period, while 11 states prohibit life settlements until the policy is at least five years old.
| Two-Year Waiting Period | Four-Year Waiting Period | Five-Year Waiting Period |
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Contact Us for Questions About Life Settlement Laws for Your State
Harbor Life Settlements has nationwide experience managing life and viatical settlements. Our team is extremely knowledgeable in the complexities of state regulations surrounding these transactions. We can talk through any questions about Florida life insurance settlement laws, Oregon’s life settlement waiting period, or anything in between. In addition, Harbor Life Settlements can also estimate your policy’s value for free and without obligation. Even if you are still uncertain about whether a life settlement is the right move for you, it’s always useful to understand the value of your financial assets. Reach out to us today on our website or by phone at 800-694-0006.
