Why Stranger-Initiated Life Insurance

The life insurance industry is at crossroads. One path continues the industry on its historically important mission of providing financial protection to families and businesses. The second is a seductive route to a fast buck that could greatly harm the industry’s ability to provide consumers with affordable coverage.

Sound too trite or melodramatic? Not at all, because the stakes are high in the debate over life settlements of 2 varieties. Which one is the black sheep? Clearly, it’s stranger-originated life insurance (STOLI)-the speculation on human life by foreign hedge funds and other well-heeled investors. STOLI arrangements are contrived transactions being hatched on the toniest golf courses in the country where elite and healthy elders are wined and dined and persuaded to sell off part of their insurability for a big price.

The concern is not over legitimate life settlements where policyholders who have properly obtained coverage to protect their families or businesses no longer need it and sell their policies. These legitimate transactions represent a natural evolution of life settlements from their earlier manifestation in viatical arrangements.

Indeed, life insurers helped fuel the life settlement market as they sought to compassionately respond to the AIDS crisis, supporting federal legislation that would allow policyholders to receive tax-free benefits under viatical arrangements, as well as when they accelerated their death benefits.

Industry observers have pegged today’s STOLI dilemma to the industry’s decision to support tax-free treatment of viatical benefits. They are right. There’s no argument that even a viatical arrangement is a form of speculation on human life, with a greater profit derived to an investor when an insured dies.

So what makes STOLI different and just plain wrong? The answer is simple: It is a contrived transaction, where policies are obtained with a clear intent to circumvent state insurable interest laws. STOLI transactions serve no social purpose. They do nothing to protect an individual’s family and estate in the case of a death. They are not being used as part of an employer’s long-term planning to cover key employees or provide benefits to workers. STOLI arrangements serve as jackpots for the most cunning financiers, all at the industry’s expense, including its current and future policyholders.

One of the key battlegrounds of the issue is at the National Association of Insurance Commissioners, where commissioners are considering a proposal by North Dakota Commissioner Jim Poolman that would, with certain exceptions, prohibit the sale of any policy in its first 5 years. The wisdom in his proposal is that it sustains legitimate life settlements while ferreting out stranger-originated transactions. ACLI supports Commissioner Poolman’s concept, and will be weighing in with details.