Beware of strangers

Stranger/Investor Oriented Life Insurance not a good idea

FAIRMONT – The West Virginia Offices of the Insurance Commissioner warns against “Stranger/Investor Originated Life Insurance.”

Known as STOLI for short, these life settlement arrangements can come in different forms and names, said Dena Wildman, insurance complaint specialist supervisor for the state Offices of the Insurance Commissioner.

For example, if something happens that affects the finances or health of a consumer, he or she may no longer have the money to pay for a life insurance policy. A company may offer a specific payment to the person, continue paying the premiums, and will become the beneficiary of the death benefits, Wildman said.

In some cases, a stranger purchases a life insurance policy from another individual for a certain amount of money, she said. Another method is when a company contacts a consumer and offers to buy a policy from him or her for cash value. One of these arrangements could involve an individual entering into free or no-cost life insurance, or someone may buy a policy just to sell it to a third-party investor. In viatical settlements, different investors will invest in a life insurance policy on a person who has some sort of life illness.

“Anytime someone’s wanting to buy your policy from you, you should always question it,” Wildman said.

She said consumers should be careful when thinking about participating in a STOLI arrangement. Persons need to determine whether a tax consequence or other problems could result if they purchase one of these life settlement arrangements. It could also cause limits on future insurability or higher premium for additional coverage.

“The first thing to consider is someone is going to make money off your death, Wildman said. “Youu’re putting your life in someone’s hands who will profit from your death, which is a scary thing.”

“They may not give you what your policy is worth. (Consumers) are not going to benefit from what they paid over the years.”

STOLI arrangements often originate from investment firms that set up trusts specifically for this purpose and often target people who are 65 to 85 years old. West Virginia doesn’t license these types of companies, she said.

Wildman said the Offices of the Insurance Commissioner receives calls from people questioning life settlement agreements and refers these types of complaints to the auditor’s office.

People may consider a STOLI life settlement arrangement if they have an illness or are in a tough financial situation, but clients can obtain accelerated benefits from insurance firms without having to sell their policy to another company, she said.

In most cases, people establish a life insurance policy to take care of family in the event of their death and designate loved ones as beneficiaries. With an accelerated death benefit, a person gets a portion of the benefits now and family or friends also receive death benefits, Wildman said.

If a company offers to purchase a consumer’s life insurance policy, the person should always investigate the business and also look into the benefits and options associated with their existing policy.

Wildman advised consumers to “know their policy and check it out first before they agree to anything. They may have an accelerated death benefit available to them.”

Source: Jessica Legge
For life insurance premium financing (not STOLI), please call a premium finance professional at 1-888-973-8377

Coming soon, a site dedicated to Life Settlement Articles (LifeSettlementArticles.com)

After 16 months of debate, the National Conference of Insurance Legislators (NCOIL) has adopted an amended Life Settlements Model Act (Model Act). The Model Act was unanimously adopted during NCOIL’s Annual Meeting in November. First adopted in November 2000 and last updated in July 2004, the Model Act “is a targeted attempt to prohibit controversial stranger-originated life insurance (STOLI) transactions while encouraging legitimate life settlements.”1 Although the Model Act and the amended Viatical Settlements Model Act adopted earlier this year by the National Association of Insurance Commissioners (NAIC) have similar objectives, there are several substantive differences between the two model acts.

Among the notable differences, NCOIL has adopted a “first-of-its-kind definition of STOLI,”2 which is defined as “a practice or plan to initiate a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the insured.”3 The definition goes on to say that “STOLI practices include but are not limited to cases in which life insurance is purchased with resources or guarantees from or through a person, or entity, who, at the time of policy inception, could not lawfully initiate the policy himself or itself, and where, at the time of inception, there is an arrangement or agreement, whether verbal or written, to directly or indirectly transfer the ownership of the policy and/or the policy benefits to a third party.”4

Another distinguishing point between the two models is the length of time a policyholder is prohibited from settling a policy. The NCOIL Model Act has a two-year moratorium on settlement, which parallels the contestability period traditionally used in life insurance contracts, whereas the NAIC model has a five-year moratorium with certain exceptions for life-changing events.

Recognizing that some commentators have criticized the five-year ban in the NAIC model as addressing STOLI at the back-end, North Dakota State Representative George Keiser, NCOIL’s Life Settlements Subcommittee chairman, said, “STOLI occurs at the front-end of a life insurance sale. By defining STOLI, and strengthening reporting requirements and penalties for participating in STOLI, the NCOIL model gets at the heart of what needs to change.”5 Despite the amendments to the Model Act, “[NCOIL] attempted to protect all of the legitimate applications of financing, trusts, and the structural options that exist in packaging products sold, both from the life settlements perspective, and from the life insurance industry,” said Mr. Keiser.6

The Model Act also includes:(1) a recommendation that states amend their insurable interest laws, if necessary, to prevent the use of trusts to benefit investors without insurable interest; (2) an annual statement requirement for contracts settled within five years of policy issuance; and (3) a penalties section addressing fraudulent life settlement acts.

Source: Mondaq

Goldman Sachs Group Inc. has announced the first of a new series of indices to help financial institutions, like pension funds, with exposure to American mortality and longevity rates better understand their risk in these positions.

The initial index will independently track monthly a pool of 46,290 anonymous U.S. citizens over age 65, providing real-time publication of mortality information. The results will be periodically verified by a third party.

The New York financial firm said that until now, holders of mortality risk – such as insurance carriers and reinsurers – and holders of longevity risk such as pension funds and annuity writers – had no mechanism to manage their exposures in the capital markets.

Now, hedge funds, banks and asset managers with existing positions in the cash longevity market, or those with an interest in gaining synthetic exposure to this uncorrelated risk class, will be able to use the index to either hedge existing exposure or to initiate investments.

“This will result in more transparent pricing of longevity risk, should reduce transaction friction, and will likely lead to improved economics for market participants,” said Alex Dubitsky, head of Goldman Sachs’ Longevity Markets Group.

The index also could help manage risk in a burgeoning business market that, in effect, makes hedges on death itself. The business is referred to as “life settlements.”

The way it works is a firm pays the holder of a life insurance policy a lump sum for the policy now, takes over paying the premiums for as long as the insured person lives, then collects the benefits — generally worth far more — when the person dies. The firm keeps some of the policies in its own portfolio. It sells others to institutional investors.

In April, Goldman Sachs, Credit Suisse Group and Bear Stearns Co. helped form the Institutional Life Markets Association to lobby against efforts to restrict the business. If successful, Wall Street firms could buy policies directly and squeeze out the middlemen. This year, Cantor Fitzgerald LP set up an Internet-based exchange for those who want to sell or buy policy rights.

Life settlements stir objections, and not only because they make some people squeamish. Some state regulators have called life-settlement terms unfavorable in some cases to policyholders. They’ve also charged that certain arrangements flout the spirit of laws designed to keep speculators from taking out policies on strangers.

Source: Wall Street JournalÂ