Stranger-Originated Life Insurance
By BOB LOTANE
Published: Wednesday, August 19, 2009 at 12:38 a.m.
Last Modified: Wednesday, August 19, 2009 at 12:38 a.m.
Stranger-originated life insurance has kind of a creepy sound to it and for good reason. Our association has spearheaded the fight to contain STOLI abuses through education and legislation, and, sadly, we are now seeing additional and more egregious examples of the harm wrought by STOLI.
The predominant manner in which STOLI operates is that investors induce seniors to purchase expensive life insurance, loan them money to pay the premiums and, after the two-year contestability period, assume ownership of the policy.
The sooner the person dies, the more profitable the death benefit the investor(s) collects. Consumers lured into such deals are often unaware of the tax consequences and legal fees and of the fact that their insurance capacity is being used up and they may not be able to protect their families (insurance capacity is the maximum amount of insurance that you are allowed to purchase on your life).
Now we are seeing an even more egregious practice of people being lured into these deals and being convinced to pay the premiums themselves and being promised they will make a hefty profit after two years of payments. Recent reports detailed how an 81-year-old man is suing the person who advised him to purchase a $5 million life insurance policy with promises that he could make a huge profit by selling it to investors. After two years and $322,000 in premium payments the policyholder was told there was no market for the policy. Worse, the person who allegedly lured him into the deal reportedly conducted seminars where he pitched similar deals to hundreds of seniors.
Published reports also detail how talk show host Larry King sued the broker who he said lured him into such deals harming his financial interests, and he learned that these schemes harmed his ability to buy insurance to protect loved ones.
Legislation was killed this year in the Florida Legislature that would have reigned in STOLI in Florida. The bill would have protected legitimate viatical settlement deals. It was supported by CFO Alex Sink, Insurance Commissioner Kevin McCarty, and most of the life insurance community.
The legislation was killed largely due to a high-priced lobbying campaign launched by the viatical settlement industry.
That is unfortunate because the bill was designed to protect legitimate viatical deals where a policyholder seeks to sell a legitimately obtained life insurance policy after the two-year contestability period, or at any time, for causes such as death of a spouse, divorce, disability, bankruptcy, loss of job, or terminal illness.
It would simply impose a five-year settlement prohibition on deals that contain STOLI features making such deals much less lucrative.
Floridians, particularly our large retiree and senior citizen communities, understand the value of solid life insurance.
In 2007 individual life insurance coverage purchased by Floridians totaled $120 billion and group coverage amounted to over $400 billion.
Hopefully lawmakers will move to end abusive STOLI deals and the damage it threatens to do to the legitimate life insurance industry in Florida while protecting our ability to sell our policies to deal with adverse life circumstances.
[ Bob Lotane is the communication and political affairs director for the National Association of Insurance and Financial Advisors-Florida, Tallahassee.