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                                 December 2006

      On December 10, 2006, the NAIC Life Insurance and Annuities (A)
Committee approved significant changes to the Viatical Settlements Model Act.
The changes are scheduled to be considered by the full NAIC at the 2007 Spring
National Meeting in March.

        The amendments approved by the Committee are aimed primarily at
curtailing “investor-initiated life insurance” or, as it has been termed more
recently, “stranger-initiated life insurance.” To this end, the amendments
establish a five-year prohibition on the settlement of a policy following issuance,
except under certain narrowly defined circumstances.

       The Committee was especially concerned with certain premium finance
arrangements that it considered to be designed to produce high-value policies for
sale on the secondary market. Thus, the approved amendments define a “viatical
settlement contract” subject to the five-year prohibition to include a premium
finance loan where any of the following apply:

   •    The loan proceeds are not used solely to pay the premiums for the policy
        or the costs of the loan;
   •    The policyowner or the insured receives a guarantee of a future viatical
        settlement value of the policy; or
   •    The policyowner or the insured agrees to sell the policy or any portion of
        the death benefit at a future date.

        The Committee also expressed concerned with premium finance loans
secured only by the market value of the policy—i.e., “non-recourse” loans—as a
potential source of investor-initiated policies. Although the amendments are not
entirely clear on this point, it appears that a non-recourse premium finance loan
would not constitute a “viatical settlement contract,” so long as none of the
conditions listed above are present. Thus, nothing in the amendments appears to
prohibit a policyowner from obtaining a non-recourse loan at any time. The five-
year prohibition on settlements, however, would prevent the policyowner from
settling the policy within five years of issuance to pay off a non-recourse loan.
This restriction could reduce the attractiveness of non-recourse premium
financing arrangements.

        The approved amendments exempt certain transactions from the definition
of a “viatical settlement contract.” Exempted transactions include, among other

   •   A policy loan or accelerated death benefit made by the insurer; or
   •   A loan based solely on the cash surrender value of the policy made by a
       licensed lender where the lender takes collateral assignment of the policy,
   •   Any further assignment of the policy by the lender in case of default.

These, and other exempted transactions, are not subject to the five-year
prohibition on settlements.

        The amendments also permit settlement of a policy at any time under the
following circumstances: terminal or chronic illness of the policyowner or insured,
disability of the policyowner, death of the policyowner’s spouse, the
policyowner’s divorce of his or her spouse, or bankruptcy of the policyowner. In
addition, the prohibition against settlements is shortened to two years in the case
of financed policies that meet all of the following conditions prior to issuance and
for at least two years following issuance:

   “(a) Policy premiums have been funded exclusively with unencumbered
        assets, including an interest in the life insurance policy being
        financed only to the extent of its net cash surrender value, provided
        by, or fully recourse liability incurred by, the insured or [certain
        persons with an insurable interest in the insured’s life];

   “(b) There is no agreement or understanding with any other person to
        guarantee any such liability or to purchase, or stand ready to
        purchase, the policy, including through an assumption or
        forgiveness of the loan; and

   “(c) Neither the insured nor the policy has been evaluated for

The language of this provision is somewhat tangled and may need to be clarified
by the Committee, especially the reference to “fully recourse liability.”

       At the December 10 Committee meeting, interested parties, including the
American Bankers Insurance Association, raised concern that federal law may
preempt the approved amendments insofar as they restrict the ability of
depository institutions to engage in premium finance. A representative of the
Office of the Comptroller of the Currency (“OCC”) who was present at the
meeting stated that the OCC was preparing an opinion on this issue. The
Committee approved the amendments with the understanding that it would revisit
the preemption issue if necessary after the OCC’s opinion is received.

       The approved amendments include a number of other provisions,

   •   New bonding requirements for viatical settlement providers and viatical
       settlement brokers;
   •   A requirement that viatical settlement brokers disclose to the viator the
       gross offer for settlement made by any viatical settlement provider and the
       total compensation that would be paid to the broker;
   •   A requirement that viatical settlement brokers disclose to all viators that
       the broker represents the viator exclusively, and not the insurer or viatical
       settlement provider;
   •   Other new disclosure requirements for viatical settlement brokers and
       viatical settlement providers, including a requirement that brokers and
       providers disclose to insurers any transaction, or series of transactions,
       entered into for the purpose of engaging in viatical settlements during the
       five-year prohibition period;
   •   An expanded rescission period for settlements;
   •   A requirement that insurers promptly effect lawful changes in ownership or
       beneficial interests in a policy;
   •   New conflict of interest requirements that prohibit viatical settlement
       brokers from doing business with affiliated viatical settlement providers
       and other affiliated entities.

For more information please contact:

Thomas A. Player, 404-504-7623,

Joseph T. Holahan, 202-408-0705,

Anthony C. Roehl, 404-495-8477,

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