NAIFA, AALU and ACLI Issue STOLI Primer
Issue: Stranger-Originated Life Insurance (STOLI)
Date: March 21, 2008
Action Taken: NAIFA, AALU and the ACLI recently issued a primer on stranger-originated life insurance (STOLI), entitled STOLI: The Problem and the Appropriate State Response. The primer is a brief background paper designed for use by our members and spells out what we see as the problem with STOLI, what we think is the best way to stop STOLI, and responds to some of the myths being spread by proponents of STOLI. The primer can be found on the STOLI information page on NAIFA’s website at www.naifa.org/stoli.
Background: STOLI transactions are used by unrelated investors and speculators as a way to circumvent state insurable interest laws. In STOLI transactions, investors entice seniors to take out policies, with the intent of all the parties to the transaction being that the policyholder will transfer most of the policy benefits to those investors, who will then profit when the senior citizen dies. The sooner the policyholder dies, the greater the investor’s profit. The seniors purchase the policies in their own names but agree to an arrangement where the investors, after a period of time (usually the expiration of a two-year contestability period) get beneficial ownership of the policy. The seniors receive some financial inducement for this, be it an up-front payment, a portion of the profit when policies are sold or a small continuing interest in the policy death benefit.
NAIFA Position: NAIFA opposes STOLI transactions. STOLI violates 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. STOLI also could potentially expose consumers to unexpected taxes, loss of privacy, and inability to obtain needed life insurance in the future.
NAIFA does not oppose legitimate life settlements. 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 that leads him or her to decide that the policy is no longer needed. 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.
Next Steps: More than 25 state legislatures are currently considering legislation that attempts to restrict or prohibit STOLI transactions. The STOLI Primer will assist state associations and their members in their efforts promote passage of appropriate legislation and stop STOLI.
NAIFA Staff Contact: For additional information, please contact Gary Sanders at GSanders@naifa.org.
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