NCOIL Adopts Life Settlement Model With STOLI Definition

The NCOIL model imposes restrictions for 2 years, which reflects the contestability period traditionally used in life insurance contracts.

NCOIL members wanted to adopt the model at the annual meeting, to give state lawmakers a chance to bring the model before state legislatures starting in 2008.

Going into the meeting, life insurers, life settlement firms and institutional investors still disagreed about many points in the 34-page model draft. Participants thrashed out their concerns for 5 hours, Nov. 14, and NCOIL then scheduled another round of discussion Nov. 15.

Georgia state Sen. Ralph Hudgens, R-Hull, Ga., came up with a compromise definition of stranger-owned life insurance while the discussions were under way.

STOLI is “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,” according to the text of the definition.

“STOLI practices include but are not limited to cases where 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 themselves, 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,” according to the definition text.

The definition offered by Hudgens also includes a provision dealing with use of trust arrangements to obtain STOLI.

“Trusts that are created to give the appearance of insurable interest, and are used to initiate policies for investors, violate insurable interest laws and the prohibition against wagering on life,” according to the definition text.

The American Council of Life Insurers, Washington, had emphasized the need for including a definition of STOLI in the model, to help insurers identify and reject efforts to set up the arrangements while the parties involved are still applying for coverage.