Some of California’s elderly are being persuaded to assign their life-insurance policies to investors who pay the premiums and then cash in when the person dies—a nationwide practice that is legal but is drawing the attention of insurance regulators and lawmakers. Insurance officials are considering rules to crackdown on the practice, which is called a life-settlement contract.
Related to that issue is something called “STOLI,” for “stranger-originated life insurance” or “stranger-owned life insurance,” in which a stranger approaches a senior citizen, often a senior of high wealth, and induces the person to buy life insurance. The “stranger” pays the premiums and becomes the beneficiary of the policy, then collects on the coverage when the elderly person dies. It is sometimes called “IOLI,” for “investor-owned life insurance.”
“The come-on to the senior citizen is that it is free insurance and they say, ‘We will pay the premium. Go get the insurance and transfer it to us later,” said Brad Wenger of the Association of California Life and Health Insurance Companies. “It’s too good to be true, and we think it is a violation of insurance law.”
“It strikes at the heart or is the very opposite of what insurance is intended to be,”Wenger said. “It’s supposed to protect families and estates, not be a money-making scheme for third parties.”
The investors may make up front payments to the seniors as an inducement to engage to obtain the coverage. The payments may be a part of both the life-settlement contracts as well as the STOLIs.
The scope of the problem is unknown, although nationally, experts believe the assigned life-insurance practice and STOLI involves about $1 billion; some put the figure much higher. There are no estimates for California. The lack of data about the practices result in part from the fact that they are not regulated.
“STOLI arrangements turn the purpose of life insurance on its head. Instead of taking out policies to protect and benefit those with an insurable interest, it is initiated by strangers who attempt to circumvent the purpose of state insurable interest laws for their own investment purposes,” according to a bulletin issued last year by a coalition of life insurers and financial advisers.
Legislation authored by Sen. Mike Machado, D-Linden, for the first time in the nation, would tighten the rules on life-settlement contracts and outlaw STOLI agreements. The proposed law, SB 1543, is one of hundreds of bills that was approved by the Legislature by has not yet been sent to the governor because of the dispute over the state budget.
Among other things, Machado’s bill requires detailed disclosure for life-settlement contracts and places them under the jurisdiction of the insurance commissioner.
“Also known as STOLI (stranger owned life insurance) or IOLI (investor owned life insurance) it is one of the best-kept secrets in the world of insurance,” according to PremiumFinanceAnalyst.com.
“It largely involves wealthy seniors, those above the age of 70, who have excess insurance capacity. Insurance capacity is the amount of insurance a person can purchase on their life based on their net worth and annual income. These high net worth seniors have no interest or need in purchasing any additional life insurance on their lives but would like to benefit from their ability to qualify for the coverage,” the analysis noted.
“When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger said.
STOLIs, he added, “are different.”