The NAIFA Communications Committee recently brought it to our attention that the public, the media and some NAIFA members are uncertain where our association stands on the issues of stranger-originated life insurance (STOLI) and life settlement transactions. We took the question directly to Gary Sanders, NAIFA’s vice president of securities and state government relations and our staff expert on STOLI. The following Q&A resulted:
NAIFA Blog: First, let’s clear up a point that may confuse some people. NAIFA has been very active in state efforts to oppose STOLI, in which a life insurance policy is sold in a life settlement transaction and the ownership of the policy ends up with an investor who has no connection to the insured. Does this mean NAIFA opposes life settlements?
Gary: No, NAIFA does not oppose legitimate life settlements! But NAIFA does strongly oppose STOLI transactions.
NAIFA Blog: But a life settlement is part of a STOLI transaction, isn’t it? How can NAIFA oppose STOLI but not oppose life settlements?
Gary: Yes, a life settlement is a key part of many STOLI transactions. But the critical factor in terms of determining whether a settlement is a legitimate life settlement is whether the life insurance policy that is being settled was initially purchased for a legitimate insurance purpose.
NAIFA Blog: OK, but what do you mean when you say “a legitimate insurance purpose”?
Gary: Good question. The crucial factor is whether all the rules were followed from the start, including the existence of an insurable interest at the time the policy is issued. In a typical life settlement, the policy was purchased for its intended use—to protect family members or a small business from the risk of a premature death. But after the policy is purchased, something changes in the life of the policy owner which leads her to decide that the policy is no longer needed. This could be the death of the intended beneficiary, divorce or the need for immediate cash to due to an illness or other loss. In such cases, the policy owner may decide to sell the policy to a third party. NAIFA is NOT trying to enact laws that prevent or restrict such transactions where the policy was acquired in good faith.
NAIFA Blog: Got it. But how is STOLI different?
Gary: In a STOLI transaction, the sole purpose for purchasing the underlying insurance policy is to sell it to investors—who are strangers to the insured and do not have an insurable interest in the insured’s life—after the policy’s contestability period expires. STOLI transactions are a way to get around the requirement that someone can’t take out a policy on another person’s life unless the owner has an insurable interest in the insured.
NAIFA Blog: That makes sense, but can you explain exactly why NAIFA opposes STOLI?
Gary: STOLI transactions violate the essential social purpose of life insurance, which is protection. Life insurance developed as a means to protect families from the unexpected death of a breadwinner, or businesses from the financial consequences of the death of an owner or key employee. Life insurance was not intended to be used as a vehicle for financial speculation on human life. In effect, STOLI promotes wagering on human life. STOLI also could potentially expose consumers to unexpected taxes, loss of privacy, and inability to obtain needed life insurance in the future.
NAIFA Blog: So to summarize, NAIFA opposes STOLI but supports life settlements, right?
Gary: Not quite. NAIFA does oppose STOLI. But while we do not oppose legitimate life settlements, NAIFA’s policy is not one of general support for life settlements. Here’s what our formal policy says (it references viatical settlements, but for purposes of this discussion viatical settlements and life settlements are interchangeable):
“NAIFA realizes that viatical settlements, although a potential positive consumer issue, also possess potential for significant abuse if left unregulated. The viatical transaction has insurance characteristics, and is closely related to the business of insurance. Inasmuch as NAIFA has a long-standing policy of supporting the regulation of insurance by the states, NAIFA endorses the adoption by the individual states of the NAIC’s Viatical Settlements Model Act as the most appropriate approach for establishing standards and operating procedures for viatical and life settlements.”
In practical terms, NAIFA believes that a life settlement may be appropriate in instances where the insured has carefully evaluated her unique situation and circumstances and determined that the sale of the policy in the secondary market is in her best interests. NAIFA does oppose life settlements that are used to facilitate STOLI.
If anyone still has questions about STOLI or life settlements, feel free to post them as comments to this blog post and I’ll do my best to answer them.