Florida has recently adopted amendments to its Viatical Settlement Act.
One of the new provisions, Section 626.99287 Contestability of viaticated policies, provides as follows:
(2) Except as hereinafter provided [certain life changing events, such as death of a spouse, divorce, retirement from full time employment, terminal or chronic illness, mental disability, bankruptcy, unexpected adverse change in financial situation, etc.], if a viatical settlement policy is subject to a loan secured directly or indirectly by an interest in the policy within a 5-year period commencing on the date of issuance of the policy or certificate, the viatical settlement contract is void and unenforceable by either party.
At first blush this provision would seem to be patterned after the NAIC Viatical Settlements Model Act which provides:
Section 11. Prohibited Practices
A. It is a violation of this Act for any person to enter into a viatical settlement contract at any time prior to the application or issuance of a policy which is the subject of viatical settlement contract or within a five-year period commencing with the date of issuance of the insurance policy or certificate unless the viator certifies to the viatical settlement provider that one or more of the following conditions [certain life changing events] have been met within the five-year period:
Thus, under the NAIC Model Act, once five years passes from the issuance of the life insurance policy, the policy is eligible for sale in the secondary market, and note that there is no reference to a loan secured by the life insurance policy in the NAIC Model Act.
However, under the new Florida provision, if there is a loan secured by the policy at any time during the first five years after policy inception, the policy may not be sold in the secondary market unless and until there is one of the life changing events, supported by a sworn affidavit from the viator. And note particularly that the loan is not limited to premium finance loans. Suppose a small business owner needs a loan to finance inventory, and the lender insists on a collateral assignment of a policy outstanding on the owner’s life. If that policy has been issued within five years of that business credit facility, the owner can’t sell the policy until one of the life changing events.
Those events include but are not limited to when the viator or insured becomes terminally or chronically ill, the viator’s spouse dies, the viator divorces his or her spouse, the viator retires from full-time employment, the viator becomes physically or mentally disabled, bankruptcy of the viator, or the viator experiences a significant decrease in income which is unexpected.
In short, if there was any loan secured by the policy within the first five years after issuance, the viator must wait until one of the life changing events occurs before he or she can sell the policy.
Suppose there was a policy loan secured by the policy and at year seven the viator sells the policy. Let’s further assume that a life changing event has now occurred. The viatical settlement provider must secure an affidavit plus competent proof that the life changing event occurred. But let’s also assume that the provider did not require such an affidavit at closing of the policy sale. Then the insured dies. The heirs /executor of the insured’s estate will surely argue that because there was no affidavit, although a life changing event had occurred, the viatical settlement contract is void and the death benefit is owed to the estate.
All this confusion because the drafters of the Florida statute did not follow the NAIC Model Act.