SilverLink - Fall 2008 - (Page 28)

There is a fundamental difference, however, between a Life Settlement arrangement and a STOLI transaction. A typical fact pattern in a Life Settlement case might look like this: A healthy 50-year-old purchases a $2 million universal life policy for estate liquidity and pays a “preferred” premium rate. At age 75, he determines he has spent down or gifted away his assets and no longer needs the policy for its original intended purpose. The cash surrender value is $500,000. Upon the advice of his ﬁnancial advisors, he decides to explore the sale of his policy to a Life Settlement company. The Life Settlement company requests all of his medical records and ultimately discovers that he has suffered a major deterioration in health and may not reach normal life expectancy. The Life Settlement company offers to purchase the policy for $700,000, a full $200,000 more than the policy owner would have received from the issuing insurance company. The key to the Life Settlement option is that the buyer is able to examine the insured’s medical records and, thus, determine that the insured’s health status (and life expectancy) changed substantially from when the policy was originally purchased. This is a signiﬁcant contrast to a typical STOLI transaction. In situations involving STOLI, the intent to sell the policy to investors is established at inception and third-party investors who induce individuals to purchase life insurance have no insurable interest in the insured. These investors are prohibited from purchasing the policy directly because state law and the courts consider it “gambling on human lives” and, thus, against public policy. To circumvent these rules, the investor has the insured purchase the policy. The investor then waits two years (the typical duration of the incontestability period) to purchase the policy so the insurance company cannot challenge the transaction. When the dust has settled, the policy, once owned by the insured for the beneﬁt of heirs, a business or a charity, is owned by a third party investor who has no insurable interest in the insured. The life insurance industry believes that STOLI could be a disaster waiting to happen. There have already been several notable lawsuits brought by disgruntled individuals against investor groups and many more are working their way through the court system. The incentive for fraud, and conceivably even murder, could create a public relations nightmare for the industry. The life insurance industry is very protective of the substantial tax advantages it enjoys. There is understandable concern that if Congress begins to view the sale of life insurance policies as just another investment alternative, the unique income tax advantages of life insurance will be eliminated and life insurance will be taxed like any other investment. From the perspective of the consumer, the risks are also signiﬁcant: • Senior citizens who participate in these arrangements may not be aware that the income is generally taxable and they may receive substantially less than expected. Seniors may not be aware that life insurance policies may be far more valuable to them as estate protection than as a scheme for making a quick buck. • In addition, the growth in STOLI transactions threatens to restrict the availability of life insurance to older persons and to raise the cost of life insurance for all consumers. STOLI Under Attack The sale of stranger- or investor-owned life insurance is under attack from multiple sources: State Legislatures In June 2007, the National Association of Insurance Commissioners (NAIC) approved amendments to a model act that proposes a ﬁ ve-year moratorium on settlements. By prohibiting policy settlements for ﬁ ve years from issue, the NAIC contends it will be much more difﬁcult to complete cases in which policies are originally purchased with the intent of selling them in the secondary market. Exceptions are built into the legislation to permit policy settlement within ﬁ ve years, given speciﬁc post-purchase changes in circumstances, such as death of a spouse, divorce, disability, loss of a job, bankruptcy or chronic illness. Taking a different approach, in November 2007 the National Conference of Insurance Legislators (NCOIL) approved its own Life Settlement Model Act. The NCOIL The Downside of STOLI From the perspective of the life insurance industry, STOLI violates the essential social purpose of life insurance, which is protection. Life insurance protects a family from the unexpected death of a breadwinner, or a business from the ﬁnancial consequences of the death of an owner or key employee. The essential social purpose of life insurance, as stated initially in English common law, is spelled out in state insurable interest laws and several United States Supreme Court cases. CONTACT MARK WEBER AT 402.96 4.54 42 OR MWEBER @ SSGI.COM 28

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

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.