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Life Health > Life Insurance

STOLI Bills Surface At State Level

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Ohio state lawmakers have introduced a stranger-owned life insurance bill in the Buckeye State, and New York officials apparently are drafting a STOLI bill of their own.

The National Association of Insurance Commissioners, Kansas City, Mo., and the National Conference of Insurance Legislators, Troy, N.Y., have worked this year on STOLI provisions and other changes in model laws and regulations relating to the life settlement and life insurance premium finance markets.

Individual states are making their own efforts to address concerns about STOLI arrangements.

Organizers of STOLI arrangements find investors who help unrelated consumers buy life insurance, primarily to create policies that will be available for sale through the life settlement market, which also is known as the viatical settlement market.

Critics of STOLI arrangements say the arrangements violate state insurable interest laws and may threaten the laws that now exempt life insurance death benefits payments from federal income taxes.

Insurers and some life settlement companies say STOLI organizers are getting around efforts to discourage STOLI arrangements by buying life insurance through trusts.

The Ohio STOLI bill, H.B. 404, would restrict an insured’s ability to sell a policy for 5 years if an agreement to sell the policy were entered into before a consumer submitted an application or before an insurer issued the policy.

The bill would provide exceptions for insureds who experience life-changing events, such as divorce.

An insured who used “unencumbered assets” to buy a policy could enter into a life settlement 2 years after a policy was issued, as long as there was full recourse liability, the insured had not previously agreed to sell the policy, and neither the insured nor the policy had been evaluated for a settlement.

The Ohio bill would extend the rescission period for a life settlement to 30 days, from the current period of 15 days, if a payment already has been made, and to 60 days if no payment has been made.

The bill also would require registration of life settlement investors, and it would require life settlement brokers to complete 15 hours of continuing education every 2 years.

STOLI is recognizable when there is first-dollar, non-recourse premium financing, says Mary Jo Hudson, director of the Ohio Insurance Department.

The department is not yet receiving complaints about STOLI, but it is expecting complaints to arrive in a couple of years, when consumers face concerns such as unanticipated tax bills, problems with getting insurance protection and credit problems, Hudson says.

Meanwhile, in New York, the insurance department gathered opinions and recommendations from industry stakeholders at a Dec. 5 meeting, according to insurance industry sources.

The sources say the draft now under consideration may include a 2-year restriction on life policy sales along with a provision that would regulate trusts’ participation in STOLI arrangements.

The department wants a provision to protect the viator’s identity, out of concern that “people could be rubbed out,” the sources say.

Institutional investors suggested that a separate entity could hold the viator information, sources say.

The American Council of Life Insurers, Washington, supports the Ohio bill but has not seen the latest version of the New York draft and cannot comment on that bill, a spokesman says.

Doug Head, executive director of the Life Insurance Settlement Association, Orlando, Fla., says the Ohio bill would add work without doing much to address concerns about STOLI.

A law requiring that an outside entity hold viator information is unnecessary, because that kind of requirement could be written into life settlement contracts, Head says.

Requiring that life settlement investors be registered is problematic, because logistically, for example, it would be difficult to register European investors in NewYork, Head says.

Scott Cipinko, executive director of the Life Insurance Finance Association, Atlanta, says he is “very disappointed” in the Ohio bill.

The bill resembles the NAIC model and identifies STOLI as a premium financing transaction, Cipinko says.

Affluent investors could still buy policies without non-recourse finance, then settle the policies, Cipinko says.

If potential viators have illiquid assets, that would place those contract holders at a disadvantage, Cipinko says.


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