STOLI: NAIC Approach

Stranger-Originated Life Insurance (STOLI) consists of transactions where investors entice seniors to take out policies, with the intent of all the parties to the transaction being to transfer most of the policy benefits to those investors. 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) end up with beneficial ownership of the policy. The seniors receive some financial inducement for this, be it an upfront payment, a portion of the profit when policies are sold or a small continuing interest in the policy death benefit.

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. 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. A discussion of what we see as the problem with STOLI, what we think is the best way to stop STOLI, and responses to some of the myths being spread by proponents of STOLI can be found in NAIFA’s STOLI Primer.

NAIFA does not oppose legitimate life settlements. 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 was issued. In a typical life settlement, the policy was purchased for a legitimate insurance purpose—to protect family members or a small business from the risk of a premature death. After the policy is purchased, changes in the life of the policy owner lead him or 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 due to 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 for a valid insurance purpose.

Acting in cooperation with our industry coalition partners, NAIFA, our state associations and their members have aggressively pursued legislation in numerous states to stop the spread of STOLI transactions. Despite intense opposition and large expenditures of both human and financial resources by STOLI proponents, over 30 states have acted to protect seniors and stop STOLI.

The laws that have been enacted follow several different approaches. Eleven states follow an approach based on the NAIC viatical settlement model, which prohibits life settlements for the first 5 years after policy issuance if the transaction exhibits certain indicators of STOLI; the model does allow for the settlement of a policy at any time due to death, divorce, financial trouble or illness. Twelve states have enacted legislation based on the NCOIL life settlement model regulation, which bans STOLI transactions, contains important life settlement reporting requirements to enable regulators to identify STOLI transactions and prohibits inducing someone to purchase a policy for the sole purpose of entering into a life settlement. Seven states have enacted legislation designed to stop STOLI but which does not follow either the NAIC or NCOIL models.

The following states have enacted laws which track the approach followed in the NAIC’s Viatical Settlements Model Act and Regulation: Iowa; Minnesota; Ohio; Oregon; Nebraska; New Hampshire Nevada; North Dakota; Vermont; West Virginia; Wisconsin.