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.
To be sure, STOLI is wrong from many perspectives.
Wagering on the lives of strangers is, clearly, morally wrong. We’ve decided in this country that people should not be allowed to sell their organs, and gambling on when a stranger will die is no less repugnant than this unseemly practice. Our society values human life while STOLI treats people as a commodity that is bartered in the marketplace.
STOLI could alter the historic trend to lower-cost coverage. For years, the cost of coverage has been declining due to ever-improving underwriting combined with increasing lifespans. STOLI introduces an artificial element into life insurers’ risk pools that represent new and incalculable risks to insurers. These higher risks come at a price–a price policyholders may have to bear.
Finally, STOLI invites wrong-doing because its investors are betting on seniors’ deaths, not on their continued good health. This gaming scheme simply attracts nefarious activities targeting the elderly, the ramifications of which are unknown, but potentially very disturbing.
From every perspective, STOLI makes a great case for new legislation or regulations that curb its blatant abuse of the insurable interest law. We must right the wrongs of STOLI and take the industry down the right path before it’s too late.
“STOLI arrangements serve as jackpots for the most cunning financiers, all at the industry’s expense, including its current and future policyholders.”