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Life Health > Life Insurance

West Virginia, Indiana Diverge On Legislation Regulating STOLI

By Matt Brady

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The life settlement industry counted the recent passage of legislation aimed at preventing stranger-originated life insurance in Indiana and West Virginia as a split decision, while life insurers and a group representing financial advisors applauded both states for taking action on the issue.

“It’s wonderful that we are starting to see some action on STOLI,” said Jeffrey Taggart, president of the National Association of Insurance and Financial Advisors. “First West Virginia, and now Indiana.”

Doug Head, executive director of the Life Insurance Settlement Association, also offered praise to Indiana state lawmakers for their work. “The legislature of Indiana has taken significant and well-balanced measures to protect the rights of consumer policyholders in that state after they came under attack by life insurers earlier this year” he said.

The Indiana measure maintains a two-year contestability period for insurers and mandates that a life policy is not valid if insurable interest was not present when it was initially purchased. In effect, Head argued, the legislation places the issue of STOLI into the hands of the primary market.

“We do not believe that STOLI is a secondary market problem, but, by definition, is a problem of strangers originating a life insurance policy,” he said. “Insurers sell policies, and they need to combat STOLI when they are aggressively marketing to seniors.”

However, the executive director of NAIFA’s Indiana organization, Kim Stoneking, said the Indiana legislation came as a result of many different groups working together.

“The passage of this legislation was a team effort,” she said. “Key legislators and lobbyists representing life insurers and NAIFA were keenly involved, and we had very good grassroots support from individual producers through NAIFA-Indiana.”

American Council of Life Insurers President Frank Keating was also a supporter of the bill, offering his congratulations to Indiana’s legislators “for making their state one of the first in the nation to act on STOLI.”

Far more contentious, however, was the response to the passage of legislation in West Virginia.

LISA’s Head harshly criticized the West Virginia language, which he said was based on a model crafted by the National Association of Insurance Commissioners.

By signing the legislation, West Virginia Governor Joe Manchin completes “a line of poor decisions and a bad process which will lead to the denial of consumer property rights for West Virginia residents unequalled in the country,” he said.

NAIFA’s Taggert saw the bill somewhat differently, saying that it in fact contains provisions from both the NAIC and National Conference of Insurance Legislators’ models, including a 5-year moratorium on the settlement of some types of policies, a legal definition of STOLI, and the classification of STOLI as a fraudulent act.

Head said provisions such as the moratorium limit consumer freedom to sell their policies, and he offered harsh criticism for the process by which the West Virginia legislation passed, claiming that proponents of the measure effectively sought to push it past the legislature before anyone noticed.

“It is difficult for outside observers to believe that this happened with so little comment or awareness in the press or by the West Virginia public,” he said. “But it is understandable when one realizes that the bill was introduced on the last possible day, had less than 15 minutes of hearings or discussion in either chamber, and was rushed through the two houses. This is a strategy proponents of this legislation have tried in other states because they don’t want a real examination of the issues. But, to date, it has only worked in West Virginia.”

Keating, on the other hand, praised the West Virginia bill as a strong measure providing the “highest level of protection in the nation” to counter STOLI transactions.

“Senior citizens in West Virginia can thank their government officials for being in the forefront of the effort to deter STOLI,” he said. “These contrived transactions aim to turn a product intended for the financial protection of families and businesses into a windfall for hedge funds.”

Taggert said STOLI issues are of special concern to NAIFA, in that they run counter to the intent of life insurance policies.

“STOLI transactions violate the essential social purpose of life insurance, which is protection, and NAIFA strongly opposes them,” he said. “Life insurance was not intended to be used as a vehicle for financial speculation on human life.”

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