Yesterday's Wall Street Journal reports that Deutche Bank AG has sued two California insurance agents for alleged fraud and breach of contract. The suits involve efforts by the agents to sell life insurance policies on elderly people to Deutsche Bank, which would in turn pool them with hundreds of other policies and repackage them as notes, funds or securitized investments. Grimly, the investors would reap profits as the insured people began to die. The agents, who deny wrongdoing, also face felony embezzlement charges brought by the state of California, and their licenses are under review by the state insurance department.
The cases point out many of the problems with stranger-originated-life insurance (STOLI) products, and also show why NAIFA and other leading industry groups have opposed these transactions for years. Unlike legitimate life settlement transactions, in which an insured person decides to dispose of a no-longer-needed insurance policy bought in the past for legitimate purposes, STOLI policies are intended from the outset as investments for people who have no emotional or other connection to the people being insured. Why are these things so bad?
- STOLI transactions violate the essential social purpose of life insurance - to provide financial protection to families or businesses.
- They skirt state insurance laws, because they allow investors to buy policies the law would prohibit them from taking out on their own.
- They undermine the integrity of life insurance. If life insurance is seen as an investment product rather than a financial safety net, calls for governments to tax and regulate insurance benefits as investment income could gain traction. And when STOLI deals go bad, as in the California case reported by the Journal, they threaten to give the entire industry a black eye.
- These transactions sometimes prey on the elderly and their families, who may not understand all of the consequences of entering a STOLI arrangement. For instance, people cannot buy unlimited amounts of life insurance and STOLI policies can prevent them from buying policies they need for legitimate purposes. STOLI transactions also open them to potential fraud or tax liabilities.
That's not what life insurance is about.
More information is available from the STOLI Alert newsletter, a quarterly publication by NAIFA and the American Council of Life Insurers.