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Length: 8.5 minutes
NAIFA and its colleagues at AALU and ACLI are concerned about the recent rise in popularity of stranger-originated life insurance transactions, known as STOLI. NAIFA's new Advocacy Podcast explains what STOLI is -- and isn't -- and why these transactions are bad for consumers and our industry.
In July's podcast, Gary Sanders, NAIFA senior counsel for law and government relations, provides an overview of this complex issue. In STOLI transactions, a promoter or sponsor encourages wealthy, elderly individuals to purchase life insurance policies on their lives, with everybody’s intent being that the insured will sell the policy to investors after the incontestability period expires. The promoter typically arranges for non-recourse premium financing to facilitate the purchase.
While these deals may seem like a win-win situation for everyone involved, Sanders explains some of the numerous causes for concern in the proliferation of STOLI programs.
Transcript
HOST: Welcome to the NAIFA Advocacy podcast, the broadcast about important legislative issues affecting NAIFA members. I'm Andy Moyer, communications producer for NAIFA. Joining me from our office in Washington is Magenta Ishak, director of political affairs, and Gary Sanders, senior counsel for law and government relations. Magenta, would you like to go first?
MAGENTA ISHAK: Sure Andy, thanks. Gary, I understand that over the last couple of years NAIFA's been asking state regulators to help stem transactions known as stranger originated life insurance, or STOLI, in order to protect traditional uses and purposes of life insurance. I guess my first question is, what is STOLI?
GARY SANDERS: STOLI is basically a sort of a catchall phrase we've come up with to talk about situations where a speculator or a promoter who has no relationship with the insured, basically seeks out and encourages older people to initiate insurance coverage on their own lives. And typically the promoter or speculator will arrange premium financing to help the insured cover the premium payments on the policy. The key thing here is that everybody's intention at the time the policy is purchased, is that the insured is going to transfer the policy to some third party investors at the end of the policy's two year and contestability period.
Basically the parties are agreeing at the time the policy's purchased, a life settle the policy two years down the road.
MAGENTA ISHAK: Well what's the difference between STOLI and other live settlements?
GARY SANDERS: The key thing I think is that with STOLI, everybody's intention at the time the policy is taken out, is that the policy will be settled two years down the road, in other words, the insured intends when they sign up the for policy, that they're going to sell the policy in a couple of years. In the typical life settlement situation, somebody takes out a policy, a life insurance policy, for a legitimate insurance purpose, to protect against some type of unforeseen need because of whatever, their circumstances change significantly enough that, they find they no longer need their policy.
In that type of situation, a life settlement often times may make sense for the person.
MAGENTA ISHAK: So Gary, does NAIFA oppose all life settlements?
GARY SANDERS: No and I think that's a very important distinction and we really need to make that point very clear. NAIFA opposes situations where a policy is taken out for the express purpose of life settling it two years down the road. In a typical life settlement situation, somebody will take out an insurance policy for a legitimate purpose, to address a perceived need that may or may not arise down the road. What happens then is that the policyholders and the policy owner's life circumstances change such that he or she determines that, in his own best interests and based on his own circumstances, he no longer needs that policy.
In that situation NAIFA does not oppose life settlements, again, as long as it's in the best interest of the consumer, based on that consumer's own circumstances. STOLI is an entirely different situation because in STOLI, as I've mentioned, it is every… it's everybody intention from the outset, from the time the policy is taken out, that the policy will be life settled two years down the road. Essentially you're turning an insurance policy into an investment or another commodity to be used as an investment.
MAGENTA ISHAK: But STOLI actually sounds like a good deal for everyone, what's the problem with it?
GARY SANDERS: There are several problems really. First, life insurance is unique, it receives special protections under federal and state law because it's purpose is to protect the long-term interests that people with some connection to the insured, whether they be families, businesses, employees or charities. State insurable interest laws actually were developed to make sure that life insurance policies were taken out only by individuals, families, or businesses with an interest in the continued life of the insured. Now the problem with STOLI is that number one, it turns insurance into just another commodity, just another tool for investors to use, which is far from what the original purpose of the life insurance is.
Number two, it violates the purpose, even though it may not violate the letter, of sound insurable interest principles that are quite frankly older then America is. Another problem with STOLI is that these types of transaction count use up an insured's future insurability. As you know, people can't take out an unlimited amount of insurance on their life. People take out STOLI policies and these policies are usually quite sizeable, into millions of dollars. And the possibility exists that someone may not be able to take out future insurance when they actually have a real insurance need.
Another problem is that STOLI could result in unexpected tax liabilities for the insured, it could also lead to higher insurance premiums for all consumers, and finally, and this is the biggie I think, it could really threaten the current tax status of life insurance products. When insurance is just another commodity, just another investor… investment, why shouldn't it be treated as just another investment?
MAGENTA ISHAK: Okay I understand the reasons we're concerned about STOLI, what is NAIFA doing to put an end to it?
GARY SANDERS: Ah Magenta we're sort of active in, I would say in all aspects of this issue basically. First and foremost over the past, I would say 18 months, we've been working real closely with our colleagues at the American Council of Life Insurers and the Association for Advanced Life Underwriting, to help the NEIC draft amendments to its Biotical Settlements Model Act. I'm happy to report that on June… on June 3rd, the NEIC amendments to the Biotical Settlements Model Act that will go a long way towards stopping STOLI.
In addition, the National Conference of Insurance Legislators, a group of state legislators with a particular interest in insurance issues, is working on amendments on to their own life settlements model act. We're also working closely with that group to help them craft appropriate amendments. In addition to that, we are putting out, along with the ACLI, a document called STOLI alert which is essentially a newsletter on STOLI and issues surrounding STOLI which not only puts forth the latest developments, but also our position on these issues.
That comes out once every couple of months, beyond that we are… also engaged in sort an ongoing public relations and media campaign that involves issuing newsletters… talking points and such, to help address what we feel are the problems of STOLI.
MAGENTA ISHAK: What about the state associations Gary, are they involved in this effort?
GARY SANDERS: NAIFA state associations play a key role in this effort from top to bottom. At the NEIC the state associations wrote letters to their insurance commissioners urging them to support the amendments of the model act and then most states followed up with either a meeting or a phone call to their commissioner.
MAGENTA ISHAK: Can you give me an example?
GARY SANDERS: In addition to the letter-writing campaign at the NEIC, our individual states are active in this area as well. North Dakota is a great example. The North Dakota legislature considered these amendments even before the NEIC had finally adopted them. Our folks were active in North Dakota on every level from grassroots activity, to testifying before the legislature and its committees, our members used their contacts with the North Dakota lawmakers to help these amendments go through in North Dakota and North Dakota has therefore been the first state to adopt these amendments.
MAGENTA ISHAK: Thanks Gary, good example of a state association taking action. So what can the individual NAIFA member do?
GARY SANDERS: Perhaps the most important thing the individual member can do is number one, stay abreast of the issues; understand the issues, read what we put out on it here at NAIFA, through “Frontline” and other publications. And then when we ask them to do something through action alerts or other means, respond. You know our strength is in our grassroots and we have… again we have over 60,000 people across the country, in every Congressional and State legislative district.
We ask people to respond to an action alert, to contact their regulators or their lawmakers, they respond and that shows the strength of NAIFA.
MAGENTA ISHAK: Great discussion Gary, thanks.
HOST: And thank you to both of you for being on our pod cast here today. Well there you have it, stranger originated life insurance is bad for NAIFA members and their clients. To learn more about this issue and what NAIFA is doing about it, go to www.naifa.org/advocacy. You'll find a June 4th press release, several NAIFA “Frontline” articles and a new publication called “STOLI Alert.” And be sure to join us next month for a one-on-one interview with David Woods regarding Life Insurance Awareness month.
Membership in NAIFA is all about your success. We give you the tools you need to grow your business and propel your career as an insurance or financial advisor. Learn more about becoming a NAIFA member and join today at www.naifa.org/join.
[This 2007 podcast is a copyrighted production of the National Association of Insurance and Financial Advisors. All rights are reserved.]
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