Florida Insurance Regulators Gather Information on STOLI
By Donna E. Blanton
Florida Insurance Commissioner Kevin McCarty conducted a public hearing on August 28 on the business arrangements known as “stranger-originated life insurance,” or STOLI. Among the people speaking at the hearing were representatives from life insurance companies, the life settlement industry, life insurance agent trade associations, and life insurance premium finance companies.
STOLI, which also is sometimes known as spin life or speculator-initiated life insurance, is a twist on the viatical settlement and life settlement concepts. In one scenario that apparently is common in South Florida, a settlement broker (who is also a licensed life insurance agent) contacts an elderly individual (usually wealthy) and asks him or her to take out a large life insurance policy. The broker pays for the medical examination and even arranges for the premiums to be paid by investors, with the elderly individual being told he or she will have “free insurance.” Once the policy is issued, it stays in place during the two-year contestability period.
Immediately thereafter, it is sold to one or more investors. The elderly individual receives a payment for the policy, and the investors hope the individual dies soon so that they can receive the death benefit and stop paying the premiums. According to a number of witnesses testifying at the hearing, great pains are taken to hide the arrangements from the life insurance companies writing the policies, often involving misrepresentations on insurance applications, and by the creative use of trusts that become the beneficiaries under the policies.
The life insurance industry strongly opposes STOLI arrangements and is actively encouraging state legislatures to either ban or discourage them. Both the National Association of Insurance Commissioners (“NAIC”) and the National Conference of Insurance Legislators (“NCOIL) have adopted model acts relating to life settlements that are aimed at limiting STOLI arrangements. The life insurance industry believes that STOLI arrangements violate “insurable interest” statutes, which are in place in every state. Florida’s recently revised insurable interest statute, section 627.404, is “STOLI neutral,” according to Richard Gans, an attorney with the Real Property, Probate and Trust Law Section of the Florida Bar, who spoke at the public hearing and who was involved in advocating the statutory revisions.
Insurable interest statutes generally require that, at the time a life insurance policy is written, the person taking out the policy must be insuring his or her own life, the life of a close relative, or the life of someone with whom the individual taking out the policy has certain business or other relationships. However, as the Florida Statute specifically states, “[t]he insurable interest need not exist after the inception date of coverage under the contract.” § 627.404(1), Fla. Stat. Thus, life insurance policies may legally be sold by the insured anytime after the policies become effective. This occurs in viatical settlements, when a terminally ill person sells a policy to raise money to cover medical expenses, for example, or in other life settlements, when an elderly person sells his or her policy to pay for retirement or other expenses.
What differs in STOLI arrangements is that the policy is taken out with the intent that it be sold, and the transaction is arranged by a broker who will profit from the sale of the policy to one or more investors, who also hope to profit. Insurance company representatives say that this means there is no insurable interest.
“STOLI is about someone who has an interest in seeing someone die,” according to Scott Berlin, a senior vice president of New York Life Insurance Company, who testified at the hearing. “Life insurance provides a social purpose. It’s important we don’t treat it like a commodity.”
Representatives of the life settlement industry said they also oppose STOLI arrangements, but they want to protect legitimate life settlements. The model acts passed by the NAIC and NCOIL are too broad, according to Doug Head, of the Life Insurance Settlement Association, who said the NAIC model act “is an attack on consumer rights.” He also said it is difficult to use the test of an individual’s “intent” at the time the policy is taken to decide whether or not there is an insurable interest.
“It’s impossible to educate consumers and not have some consumers understand that they might [want to] sell a policy in a couple of years,” he said.
Tom Brooks, of the Institutional Life Markets Association, said “a life insurance policy is an asset that can be sold for a variety of reasons,” and the burden should be on life insurance carriers to determine whether there has been a violation of insurable interest statutes.
McCarty made clear that he does not object to “stranger owned” life insurance, noting that individuals have a right to sell their policies. He expressed greater concern with stranger-originated arrangements, but said no decision has been as to whether his Office will advocate that legislation be introduced to address STOLI. McCarty did ask a number of witnesses whether agents who make misrepresentations on life insurance applications should be subjected to criminal penalties. Susan Dawson, an attorney with OIR, also asked witnesses whether agents should be forced to forfeit commissions if it is determined they facilitated STOLI arrangements.
The record of the public hearing will remain open until September 28, 2008, and any written comments on the STOLI issue may be submitted to Bernie.Stoffel@floir.com.