Doug Head: State insurance commissioner wrong about life settlements
Florida’s Insurance Commissioner, Kevin McCarty, writing on The Sun’s web page, revealed that some insurance regulators cannot differentiate between a legitimate life settlement – the lawful sale of an existing life insurance policy to a third party for value – from the fraudulent purchase of new insurance, sold by a life insurance company’s own agent, known as Stranger-Originated Life Insurance (STOLI).
It is disturbing to think that an insurance commissioner cannot distinguish between a fraudulent insurance sale and a lawful secondary market sale.
Life settlements are a policyowner’s sale of an unwanted, unneeded, or unaffordable life insurance policy that has been in force for at least two years. Typically, the insured under the policy is age 60 or over. Life settlements pay these policyowners an average of 300 percent to 500 percent more than they would get by merely cash surrendering their policy back to the carrier. The sale of a life insurance policy is a property right, protected by the laws of Florida and the United States. Life settlements are regulated in Florida as well as in 36 other states.
STOLI, on the other hand, involves agreements made – before a policy is ever issued – between an applicant and third party investors to fraudulently apply for new policies (through licensed life insurance agents) and, after the policy is issued, to change ownership or control of the policy to the investor. STOLI agreements take place prior to policy inception and can potentially harm life insurers, insureds and life settlement companies.
The Life Insurance Settlement Association is against any and all STOLI activities as well as any practices which promote false or material misrepresentations in the application for new life insurance. Insurance companies, their home office underwriters, as well as their agents are in the best position to put an end to STOLI cases. The bottom line is that a fraudulently obtained policy cannot be settled if it is not issued in the first place.
Of late, STOLI has, in fact, been stopped. First, most insurers have long since introduced new measures to detect and prevent STOLI from even showing up at their door, as evidenced in public statements from at least 12 large insurance companies. Second, the life settlement market – itself a victim of STOLI schemes – has responded by increasing their own efforts to detect and report STOLI when reviewing applications for life settlements.
Life settlement companies are not involved in harming Florida’s life insurance policyowners and the Florida Office of Insurance Regulation is fully aware of that. In fact, the OIR’s February 2009 STOLI report does not include a single instance of consumer harm in life settlements. This is not surprising, since, according to the
National Association of Insurance Regulators own national database, there has not been a single consumer complaint involving life settlements filed in all of 2009.
Regrettably, McCarty’s attacks on life settlements merely attacks the property rights of Florida policyowners to sell, rather than surrender, their unwanted, unneeded, and unaffordable life insurance policies for significantly more than what the insurers can pay. While the OIR’s STOLI report does cite several examples of STOLI, McCarty’s office has not initiated a single enforcement action involving STOLI. If it is such a problem, one has to wonder why this is the case?
Fortunately, the Florida Legislature has taken its own actions to stop STOLI. First, in 2008, the Florida Legislature addressed STOLI by passing a new law (SB684) to strengthen the state’s insurable interest laws. That bill was recommended by the Florida Bar Association and supported by the American Council of Life
Insurers and the life settlement market.
Second, in 2009, Florida Representative Alan Hays and Senator Don Gaetz sponsored real anti-STOLI legislation (HB1167 and SB1924) that does not attack consumers’ property rights. The Hays/Gaetz legislation is based on a national model that has been successfully adopted in almost 20 states in just the past two years.
Florida’s policyowners benefit from life settlements. The life settlement market provides consumer with real alternatives to recognize the economic value of their policies as compared to the “grossly inadequate” cash surrender values that insurers would gladly pay policyowners who surrender their policies. The life settlement industry promotes legislation and enforcement of laws to stop illegal sales of new life insurance policies. STOLI is not our business and promoting confusion between fundamentally illegitimate STOLI schemes and the fully legitmate secondary market for life insurance policies ill serves both policy owners and the public at large.
Life Insurance Settlement Association