SilverLink - Fall 2008 - (Page 27)

PRIVATE CLIENT SERVICES Estate Planning STOLI Under Attack Would You Trust a Stranger with Your Life? by Mark Weber, JD, MSFS, CLU, ChFC In the July 2006 SilverLink, my article “Great Deal or No Deal?” described a transaction called Stranger-Owned Life Insurance (STOLI). At that time, investment groups (hedge funds, private equity groups and certain insurance agents) were trying to develop this market, while industry organizations and insurance companies were organizing to block this new cottage industry. Two years ago, it was uncertain which side would prevail. But now, despite millions of lobbying dollars spent by STOLI promoters, it seems clear that the anti-STOLI group will win the battle. As you read this article, at least a dozen states will have passed legislation to stop or severely curtail STOLI. How Does STOLI Work? Investors typically persuade senior citizens to purchase life insurance. The purchasers are generally 70 years of age or older and have a life expectancy of no more than 12-15 years. The policies are originally owned by the senior citizen, who agrees to allow investors to assume ownership of the policy at a later date (usually after the two-year incontestability period). The senior receives payment from the investors for allowing them to insure his or her life. Payment may be in the form of cash, an expensive car, an exotic trip or a portion of the proﬁt when the policy is sold at the end of the two-year period. During the ﬁrst two policy years, the insured individual is technically responsible for paying the premium. However, the premium is often paid by the investors in the form of a nonrecourse loan. In consideration for the loan, the individual agrees to relinquish ownership of the policy after the two-year incontestability period. The investors proﬁt by collecting the death beneﬁt after the individual dies—and the sooner the individual dies, the greater the proﬁt to the investors. What is STOLI? Stranger Owned Life Insurance is a practice or a plan whereby a life insurance policy is initiated for the beneﬁt of a thirdparty investor who, at the time of the policy origination, has no insurable interest in the insured. How Does STOLI Differ from a Life Settlement? A Life Settlement involves the sale of an existing (aged) life insurance policy by the policy owner. Historically, policy owners who no longer want or need their cash value policy had only one recourse—surrender the policy to the issuing insurer for the net cash value. In the case of a term insurance policy, the owner had no recourse but to discontinue paying premiums and allow the policy to lapse. While relieved of the burden of paying premiums, the owner received no additional value. Life Settlements created an advantageous secondary market for policy owners who no longer needed or wanted their life insurance policies. Under this scenario, a policy owner may be able to sell to a third party (investor group or institutional buyer) for signiﬁcantly more than the net cash value. The advantage for the policy owner is considerable — the sale allows the owner to maximize the value of an asset that would otherwise remain dormant. 27 SILVERLINK — FALL 2008

Table of Contents Feed for the Digital Edition of SilverLink - Fall 2008

SilverLink - Fall 2008 Table of Contents Risk Management: Toto A Marriage Made to Last Cashier’s Check Fraud? Selection Validation Digital Tool Box When the Curtain Falls Lightning Strikes Increased Fuel Economy Employee Benefits: To Infinity & Beyond Securing Retiree Healthcare Private Client Services: Batter Up! Shaking Things Up STOLI Under Attack Client Spotlight: Bellevue University Internal Happenings: SilverStone Group Wellness Activities Group

SilverLink - Fall 2008

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