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NCOIL Adopts Life Settlement Model With STOLI Definition

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The National Conference of Insurance Legislators has passed a life settlement model draft that includes a definition of stranger-originated life insurance.

The full executive committee of NCOIL, Troy, N.Y., voted unanimously to approve the model during NCOIL’s recent annual meeting in Las Vegas.

Earlier, NCOIL’s life insurance and financial planning committee approved the model by a unanimous vote.

At NCOIL, unlike the National Association of Insurance Commissioners, Kansas City, Mo., the executive committee can approve models on behalf of the entire organization, without putting the model up for a vote by an organ that includes all of the organization’s voting members.

North Dakota state Rep. George Keiser, R-Bismarck, N.D., who spearheaded development of the model, said all parties involved had to make concessions.

Representatives of life insurers, life settlement companies and institutional investors spent between 30 and 40 hours on conference calls and in all-day sessions to find a way to include a STOLI definition, Keiser said.

The NCOIL model is an alternative to an amended viatical settlements model adopted earlier this year by the NAIC.

A major difference between the two models is the length of time a policyholder is prevented from settling a policy.

The NAIC model would impose restrictions for 5 years and creates exceptions for a number of life-changing events, such as divorce.

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.


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