6.3 Special Insurance Topics in New York

Credit Insurance and Accelerated Death Benefits

Credit life and credit disability insurance pay or service a debt if the borrower dies or is disabled. The lender/creditor is the beneficiary, so the borrower needs strong protections.

• Credit life retires the loan balance on death.
• Credit disability makes the scheduled monthly payments during a covered disability, after any waiting period, until recovery or payoff.

Trap: A lender may offer credit insurance but may not require it. Tying loan approval to buying the coverage is a prohibited practice.

Accelerated Death Benefits (ADB)

New York requires insurers to offer an accelerated death benefit rider so an insured can access part of the face amount while living.

The accelerated payment for terminal illness is generally received income-tax-free under federal rules. ADB differs from a settlement: with ADB the insurer advances the benefit; with a settlement a third party buys the policy.

Viatical and Life Settlements — Article 78

New York regulates the sale of an existing life policy to a third party under Insurance Law Article 78 (Life Settlements).

In both, the buyer becomes owner and beneficiary and pays future premiums.

Core Article 78 Rules

• If the provider fails to give written notice of the rescission right, that right is tolled 30 days after notice is finally given.
• Settlement proceeds may affect Medicaid and other means-tested benefits; this must be disclosed.

Trap: The 2-year ownership requirement exists chiefly to block speculative arrangements like STOLI. Pairing the 2-year rule with the 15-day rescission window is the most-tested fact set here.

Genetic Discrimination and the STOLI Ban

Genetic Nondiscrimination

New York and the federal Genetic Information Nondiscrimination Act (GINA) restrict insurer use of genetic data.

New York's prohibition reaches both life and health insurance for the results of genetic tests; federal GINA most strongly protects health coverage and employment. A consumer must give specific informed consent before any genetic information is even obtained.

Stranger-Originated Life Insurance (STOLI)

STOLI is a scheme in which an investor with no insurable interest finances a policy on someone's life intending to become the beneficiary or to acquire the policy. New York prohibits STOLI because:

• Insurable interest must exist at issue — STOLI lacks it
• It treats human life as a speculative investment, creating moral hazard
• It frequently involves misrepresentation on the application

Distinction: A legitimate life settlement involves a policy the insured originally took out for a real need and later sells. STOLI is illegitimate at inception because there was never insurable interest — the 2-year rule and insurable-interest doctrine are the legal weapons against it.

Insurable Interest, Replacement, and Settlement Disclosures

Insurable Interest in New York

Insurable interest must exist when a policy is issued. New York recognizes it in: oneself; a spouse or close family member; and a business relationship (key person, partners, creditor up to the debt). Unlike property insurance, life insurable interest need only exist at inception, not at the time of claim — which is precisely why STOLI, lacking interest at issue, is void as against public policy.

Replacement Regulation (Regulation 60)

When a life settlement or new policy would replace existing coverage, New York's Regulation 60 replacement rules can apply to the underlying transaction. The producer must provide a disclosure statement, give the Important Notice Regarding Replacement, and document why replacing the in-force policy benefits the consumer. This protects clients from losing contestability/suicide-clause periods or paying new acquisition costs needlessly.

Settlement Disclosures and Consumer Safeguards

Under Article 78, before a life settlement closes the owner must be told:

• That alternatives exist (accelerated death benefits, policy loans, surrender)
• The tax consequences of the sale
• That proceeds may be subject to creditors and may affect Medicaid/SSI eligibility
• That the buyer may resell the policy and will receive the owner's medical and personal information

Worked example: A 70-year-old sells a $250,000 universal life policy he has owned for 9 years to a licensed provider for $40,000. This is a lawful life settlement under Article 78: the 2-year ownership rule is satisfied, the provider is licensed, required disclosures (taxes, Medicaid impact, alternatives) are made, and the owner keeps an unconditional right to rescind for 15 days after the $40,000 arrives. Had an investor funded the policy at issue intending to buy it, it would be illegal STOLI instead.