Stranger-Originated Life Insurance: Morbid Coverage

A traditional life insurance policy contracts between policy owner and insurer (insurance company). The policy owner pays an agreed upon premium during the life of the contract or lump sum. If the insurer stops paying a premium, depending upon the policy, the life insurance policy may be declared invalid. Upon the death of the insurer, beneficiary or beneficiaries named on the life insurance policy receive a lump sum amount.

Most life insurance coverage, death benefit paid conditional upon death attributed to natural causes, accidental death or related to a sickness. 1 When purchasing a life insurance policy for someone else, such as a relative (wife, husband, grandparent or child), insurable interest must be present: Establishing a sufficient strong relationship with that person based on blood, marriage or monetary interest (Examples: A creditor insures a debtor's debt will be paid after death, relationship between a business and a key employee or the relationship among partners in a partnership or stockholders in a limited held corporation.) 2

Unfortunately, great number of seniors (65 years or older, net worth of more than one million dollars or falling health 10.) have been approached by investors or non - life insurance agents, offering a morbid type of life insurance policy called Stranger-Originated Life Insurance (STOLI or Speculator Initiated Life Insurance (SPINLIFE) schemes). 3 Also, this type of life insurance policy called zero-premium life insurance policies 7 A STOLI scheme typically starts by an agent (representing investors: Pension funds, college endowments, hedge funds and other professional investors 7) not employed by an insurance company, offering a life insurance policy, and may include an offer to finance the premium payments during the first two year period known as insurable interest period (contestabiility period 8). After two years, the agent will buy the policy from the insured person, offering a cash incentive (potentially thousands of dollars 4) 9 This tactic often avoids state insurable interest laws.10 The setting for convincing a senior the merits of a STOLI, frequently takes place in a pleasant surroundings, such as a restaurant or yacht. During such a meeting, an agent may characterize a Stranger-Originated Life Insurance by saying: "risk free" or "no-cost". 3 Certainly a lump sum offered to a senior can be very lucrative, especially if senior has bills to pay (regarding a terminal illness, credit card debt or expensive health care costs 7) or happy to receive fast money to buy things. However, consumers (seniors) are not likely informed lump sum can be reduced by commissions, taxes (Contrary to traditional tax free protection receiving life insurance payout. A STOLI transaction the senior required to pay taxes on money received as a payout or incentive 3) and other costs. Besides heirs to senior estates will be very angry, may need the money to pay off deceased debts (taxes, burial expenses or other debts), before receiving any inheritance. 4 However, sometimes the insurer (senior) may be promised his or her beneficiaries receive a small portion of the policy proceeds. 14 According to the terms of a Stranger-Originated Life Insurance contract, the insurance policy purchased by investors, however the senior may not be able to obtain additional life insurance for a legitimate need in the future. 3 Also, once an investor firm or group owns a life insurance policy (life a senior), during the time the senior is a live that policy can be sold to another group of investors, potentially occurring multiple times. Actually the value of the life insurance policy may increase in value, like a stock or a bond, as the senior gets older or health diminishes, underscoring the potential of millions of dollars collected from the life insurance policy or policies of other seniors upon death. 3 Big money investors on Wall Street are purchasing these policies then dividing them into thousands of bonds, sold-off to investors, hoping to collect upon a sizable payout upon a person's death. 4 "Seniors own an estimated $500 billion of life insurance in force and more than $120 billion is estimated to qualify for life settlements" 10

Insurance companies dislike Stranger-Originated Life Insurance, because actuarial models assume a certain percentage of consumers will cancel their policies or stopping paying their premiums prior to death, assuring profitable outcome for insurance companies. (Approximately six percent of life - insurance policies lapse according to the Insurance information institute 16). However, investors that purchase individual life insurance policies, have a financial interest to make timely individual premium payments, not likely to be canceled. According to Representative Jay Hottinger (Columbus, OH 5), Stranger-Originated Life Insurance has unfortunate consequences for consumers: Insurance companies offset additional claims by increasing as much as fifteen percent premiums. 6

Reported in February 2008, The Nebraska Department of Insurance support new legislation bill (LB853), based upon a national model, extending the two year insurable interest on a life insurance policy (window) to five years, before a life insurance policy could be sold. 7 Also, reported in April 2007, North Dakota (first state) adopted a similar legislation: Insurance policy can't be sold to investors within five years of issuance. "Nine states are considering similar laws". 15 According to Nebraska State Insurance Director Ann Frohman: "That would discourage the practice because it would limit the profit companies could make with STOLI, since more older policyholders would die during the five years". Also, Senator Tom Carlson (Holdrege, Nebraska 11) involved in the life insurance business for decades said regarding the new proposed legislation: "And that characteristic has been preserved through all the years because life insurance is a product that is for the public good it is not a commodity to be bought and sold".7 Three insurance industry groups (The American Council of Life Insurance (ACLI), National Association of Insurance and Financial Advisors (NAIFA), and Association for Advanced Life Underwriting (AALU)) seeking legislation's to combat increasing number of stranger - originated life insurance (STOLI) transactions, and oppose legislation that will extend the two year insurable interest period to five years, as "clearly abusive". 10

In the State of California, law prohibits executing insurance policies as "wages" on people's lives. Stranger-Originated Life Insurance may violate that rule by waging on a senior's death. As a consequence, an insurer may invalidate a life insurance policy sold to an investment group, lacks insurable interest ("exist where the owner of the policy is closely related to the insured") clause and may sue to rescind the policy. Furthermore investors holding onto that policy potentially could sue the senior or his or her estate for damages, unable to secure death benefit declared void.

Tail sign a senior may be persuaded into a STOLI transaction, agent request confidential medical information, giving investors private information, estimate length of time a senior may live or die. 3 "South Florida as seen a spectacular growth in the sale of non-recourse premium financial life insurance policies to seniors." 12 Recommend seniors should always consult a lawyer or financial advisor before signing a life insurance policy, ensure the contract is legal and not a Stranger-Originated Life Insurance scheme. 3

In January 30, 2008, Ohio House of Representatives passed new legislature Bill 404 (Hottinger/Barrett): Give the Department of Insurance greater enforcement powers preventing Stranger-Originated Life Insurance contracts. The passage of the Bill is awaiting approval by Ohio Senate. Bill 404 potentially would prevent negative impact of STOLI upon the Ohio insurance market. Also, passage of the bill would make available and affordable insurance to older Ohioans. 14

In the United Kingdom, Nick Kiwan, from the Association of British Insurers, commented:"In the UK, we have an old insurance law dating back to 1774, which says that you are not allowed to take out a policy on someone else's life. There has to be an insurable interest." 13

In April 2007 group of banks (Goldman Sachs Group Inc, Credit Suisse Group, and Bear Stearns Cos) collaborated to form Institutional Life Markets Association (ILMA). The association seek to buy policies directly from consumers (otherwise a carbon copy of Stranger-Originated Life Insurance 17) in life - settlement business. Also, the association lobby against efforts to restrict or regulate the business.16 During 2006 life settlement market expanded to approximately $12 billion.19 The Institutional Life Markets Association goal, educate consumers by providing a transparency of information regarding life settlement transactions. In the documentation provided to consumers includes: Amount of money consumers will receive when they sell their interest in a life insurance policy, estimated cash surrender value, the amount of broker compensation, gross sales price, and net amount a consumer will receive for the sale. Further details are included in the disclosure statement. Expected by January 1, 2008 members of ILMA committed to have available a detail form out-lining to consumers life settlement transactions. "Subject to regulatory approval as may be required in various states." Jack Kelly government relations director of ILMA said: "Consumers have a right to know exactly how much their life insurance policy is worth in the secondary market and how much their brokers will earn in commission." 18

Celebrities are not immune from fraudulent agents who try to sell Stranger-Originated Life Insurance policies. "Last October (2007), talk show host Larry King filed a lawsuit against a Maryland insurance brokerage in which he admitted to taking out a $10 million dollar policy with the express purpose of immediately selling the policy in a life settlement but later concluded he had gotten a raw deal." 8

References:

1.) Life Insurance - http://en.wikipedia.org/wiki/Life_insurance

2.) Insurable Interest - http://www.insurance.com/faqs/lifefaqdetail.aspx/index/9

3.) What is "STOLI" or "SPINLIFE"? - http://www.insurance.ca.gov/0100-consumers/0250-seniors-issues/senior-stranger-owned-life-insurance.cfm

4.) Stranger-Orginated Life Insurance a bad debt, regulators say - http://www.kansascity.com/198/story/522898.html

5.) Jay Hottinger (R) - http://www.house.state.oh.us/jsps/MemberDetails.jsp?DISTRICT=71

6.) Senior Citizens BEWARE of Cash Conversion for Life Insurance Scam - http://daytonos.com/?p=593

7.) Bill takes aim at life insurance gimmick - http://www.journalstar.com/articles/2008/02/04/news/politics/doc47a50941d1f78346942555.txt

8.) Life Settlements: What Investors Should know - http://www.nuwireinvestor.com/articles/life-settlements-what-investors-should-know-51429.aspx

9.) Gambling on Death? Trends in the Buying and Selling Death Benefits - http://www.cahealthadvocates.org/newsletter/2007/12/death.html

10.) SOURCE: InsuranceNewsNet. Inc - http://www.insurancenewsnet.com/article.asp?a=top_lh&id=87329

11.) Sen. Tom Carlson (District 38, Holdrege) - http://nebraskalegislature.gov/web/public/senators/bios/carlson

12.) ATTORNEY AT LAW THOMAS L. DAVID - http://www.tdavidlaw.com/

13.) Could Stoli spread to Britain? City watchdog says the system stops insurance with strangers - http://www.independent.co.uk/news/business/analysis-and-features/could-stoli-spread-to-britain-city-watchdog-says-the-system-stops-insurance-with-strangers-783205.html?r=RSS

14.) Department Advocates Passage of STOLI Legislation to Protect Ohioans - http://www.ohioinsurance.gov/insuranceinsights/story_3.htm

15.) North Dakota blazes a regulatory trail - http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070423/FREE/70423022/-1/customerservices

16.) Betting on death in the insurance business sparks controversy - http://www.newsday.com/business/custom/retirement/ny-bzdeath1127,0,129158.story

17.) NCOIL GROUP MEETS TO DISCUSS LIFE SETTLMENT, STOLI - http://www.naifa.org/advocacy/frontline/advocacyupdates/20071026_ncoil.cfm

18.) New Disclosures for Policy Owners Part of Initiative to Ensure Transparency - http://www.newsday.com/business/custom/retirement/ny-bzdeath1127,0,129158.story

19.) Institutional Investor Journals and the Life Insurance Settlement Association, Publish New Research and Investment Strategies in a Special Section on Life Settlements in the Journal of Structured Finance - http://lisassociation.org/vlsaamembers/news/files/lisanews_26_July_2007_marketwire_Life_Settlements_Top_12_Billion_This_Year.pdf