King is simply a celebrated example of a burgeoning problem that the National Association of Insurance and Financial Advisors (NAIFA) has been warning about for years and working to address legislatively at both state and national levels. NAIFA was a key backer of a recent bill signed into law by California Gov. Arnold Schwarzenegger (SB 98) to regulate life settlement transactions and ban STOLI deals in that state.
In a STOLI scheme, investors induce seniors to purchase expensive life insurance, loan them money to pay the premiums and, after the two-year contestability period, assume ownership of the policy. The sooner the person dies, the more profitable the death benefit the investor collects. Consumers lured into such deals, such as King, are usually unaware of the tax consequences, commissions, and legal fees involved. They also seldom understand that the deal compromises or completely exhausts their insurance capacity (insurance capacity is the maximum amount of insurance that you are allowed to purchase on your life).
In an even more nightmarish scenario, people are lured into these deals and pay the premiums themselves, based on promises that they will make a hefty profit after two years of payments. The Palm Beach Post reported that an 81-year-old man is suing a Boca Raton firm that advised him to purchase a $5 million life insurance policy with promises that he could make a huge profit by selling it to investors. After two years and $322,000 in premium payments, the firm told the policyholder that there was no market for the policy. Worse, the person who allegedly lured him into the deal reportedly conducted seminars where he pitched similar deals to hundreds of seniors. As we have seen in other insurance markets, bad economic conditions lead to increased instances of fraud, unauthorized entities, and various scams. STOLI is ripe for such activity.
STOLI Legislation
STOLI deals are not to be confused with legitimate viatical settlement arrangements where there was a genuine insurable interest at the time the policy was purchased and the policy was intended to provide benefits to the beneficiary if the insured died. In legitimate viatical arrangements, insureds pay their own premiums, but come to a point where they need to sell the policy for causes such as death of a spouse, divorce, disability, bankruptcy, loss of job, financial distress, or terminal illness.
Unlike legitimate viatical/life settlement deals, STOLI schemes involve purchasing life insurance for no other reason than to market the policy and wager on the life of the insured once the two-year contestability period has ended.
Insurance Commissioner Kevin McCarty correctly pointed out in an editorial in The Gainesville Sun decrying STOLIs that they are not legal in Florida as they violate the insurable-interest law, intended to discourage individuals from wagering on other people's lives with whom they have no vested interest. An insurable interest exists when the beneficiary has a reasonable expectation that he will benefit -- by love, affection, or finances -- from the continued life and health of the person who is insured.
NAIFA-Florida joined in the push during the 2007 legislative session for a bill that boosted Florida's insurable interest law by creating standards for the sale of personal insurance policies to individuals who are seeking to insure people other than themselves. In 2008, we joined CFO Alex Sink, McCarty, the American Council of Life Insurers, and others in support of unsuccessful legislation that would have disallowed the sale of life policies purchased with loaned funds for a period of five years after issuance. NAIFA-Florida and other stakeholders are currently considering options for the 2010 legislative session.
Impact on the Industry
The fact is, today's difficult economy has led many financially strapped seniors to consider selling their legitimately procured life insurance policies. These are complex transactions with often unseen consequences, and people considering them need to meet with their financial advisors and/or agents to consider whether this is the best avenue. In addition to the cautions mentioned above, sellers of policies could lose eligibility for Medicaid and other government programs. Their advisors may be able to point to other financial options that do not involve selling the policy, such as taking a loan against the policy or getting a partial payout through an accelerated death benefit.
NAIFA's biggest concern is the effect STOLI deals will have on the life insurance industry as a whole. A recent congressional analysis estimated the tax-free buildup in life insurance over the next five years at $1.5 trillion. The report referred to this money as lost revenue, but for Florida's widows and retirees this is lifesaving revenue. If through STOLI deals life insurance becomes a product of Wall Street rather than one of Main Street, then lawmakers will tax it and deliver a body blow to our industry.
In 2007, individual life insurance coverage purchased by Floridians totaled $120 billion. Group coverage amounted to over $400 billion; residents have $1 trillion in death benefit coverage. The life insurance industry employs an estimated 75,000 people in Florida. We must protect this vital industry, which is why stopping STOLI is so important.
Bob Lotane is communications and political affairs director for the National Association of Insurance and Financial Advisors-Florida. He may be contacted at 850-544-9446 and lotane@faifa.org.
