Efforts to put legislation in place that will curb stranger-originated life insurance transactions are intensifying as legislative sessions are in full throttle.
“There has been tremendous activity all across the nation and, from our perspective, that is a good thing,” says Bruce Ferguson, senior vice president-state relations, with the American Council of Life Insurers, Washington. “Regulators and legislators understand the problem of STOLI and the need to update laws that address it.”
Currently, the laws being put in place are either based on models developed by the National Association of Insurance Commissioners, the National Conference of Insurance Legislators or hybrids comprised of elements of both.
Ferguson says the ACLI supports the NAIC’s 5-year moratorium because “it really does address STOLI head on,” but also likes elements of the NCOIL model such as the fact that it contains a definition of STOLI.
Ferguson also explains that many STOLI transactions are done through premium financing agreements. Often in these transactions, a transfer is not required but the way the agreement is structured is tantamount to STOLI, he says.
As an example, he recounts one incident experienced by a member company in which a 77-year-old woman took out a $5 million policy with a 26-month premium financing loan, 2 months beyond the incontestability period. The interest on the loan was over 19% and it would have taken $500,000 to pay the loan back. If the loan was not paid back it triggered seizure of the policy, he explains.
But the structure, he says, defies logic because if you are a high net worth person, then why would you take out a loan with 19% interest, and if you are not a high net worth person, then how would you come up with $500,000?
This example is just one instance of why current laws are not sufficient to address STOLI and that action by legislatures is needed, he contends.
As legislatures look at provisions that should be in bills they advance, Ferguson says it is important to retain points in the model including life expectancy evaluations which is disclosure that a policyholder has been evaluated for settlement and often precedes settlement.
If that provision is deleted, then it is difficult to investigate or deter, he adds.
Ferguson offered an update on the progress state legislatures are making in putting laws in place.
Legislation is in place in Indiana, Iowa, Kansas, Maine, Nebraska, North Dakota and West Virginia. In Indiana, the NCOIL definition of STOLI has been put in place and because it is a short session, it is a 2-year effort that will come up again in the next session, he says.
A law is on the brink of being put in place in Ohio where it is pending in the senate and will probably still have additional hearings. In Oklahoma, a bill is close that reflects the NAIC model with a 5-year provision.
Some states are still looking at what language to advance. In Illinois, both NAIC and NCOIL versions of a bill are under consideration, and in Connecticut, the NCOIL model with changes is being considered.