SilverLink - Fall 2008 - (Page 29)

Act provides a more comprehensive deﬁnition of what constitutes a prohibited Life Settlement, categorizes certain acts as fraudulent, increases penalties and installs new reporting requirements. Within the last few months, Nebraska, Kansas, Ohio, North Dakota, Arizona, Oklahoma, Maine, Indiana, Iowa, Connecticut, Hawaii and West Virginia passed anti-STOLI legislation and another twenty states are considering similar bills. 4. Policy Rescission— If carriers discover that an individual has purchased a policy with the intent to sell it and has been untruthful about such intent on the application, they are increasingly likely to rescind the policy from inception and simply return the premium to the owner. Fuzzy Economics It is unclear whether STOLI investors will receive attractive enough returns to make this a viable long-term investment. In addition to certain policy charges, there may be additional “friction costs,” which could prevent investor groups from receiving 100% tax-free treatment when they receive the proceeds upon the insured’s death. Some critics of STOLI believe that this strategy will go the way of sub-prime mortgages. For example, when an insured lives longer than anticipated, investment returns will drop and investors will simply put their money in other instruments. The insurance industry, however, is not willing to wait for this scenario to play itself out. It is believed that by taking action now, industry leaders can help avert a potential public relations nightmare and prevent Congress from “over-legislating” in an attempt to ban STOLI. As noted above, there has been a considerable amount of support to halt the sale of STOLI since my original July 2006 SilverLink article appeared. Despite the millions of dollars STOLI promoters have spent on lobbyists, there is a good chance that support for STOLI will continue to wane as more and more states follow Nebraska’s lead and outlaw this practice. STOLI will no doubt garner increasing media attention as colorful cases weave their way through the judicial system. No matter how these cases are resolved, if investor expectations are not met, the STOLI strategy could slowly lose favor with the investment community. Life insurance is an important ﬁnancial tool. Its use should be limited to the original, intended purpose of protection and not become an investment that gambles on human life. Federal Legislative Scene Insurance comes under the purview of state law and, typically, the federal government takes a back seat in insurance regulation. However, as part of the 2006 Pension Protection Act, Treasury is required to conduct an extensive two-year study of Investor-Owned Life Insurance. Congress may yet intervene to stop the sale of STOLI if it is deemed to be against public policy. Rating Agencies Fitch Ratings recently issued a Special Report detailing the risks of STOLI for insurers, investors and consumers. The chief concern is the lack of transparency in this market, leading to confusion and sales abuses for consumers. If rating agencies begin to downgrade companies for selling STOLI, carriers will feel even more pressure to screen out and prohibit these transactions. Carrier Approaches Life insurance companies are taking a number of steps to stop the sale of STOLI: 1. Underwriting— Questions have been added to applications and underwriters have increased their scrutiny of policies for older individuals. 2. Pricing— Some carriers have increased premiums at older ages to diminish or eliminate the arbitrage exploited by promoters and investors. Discipline Agents— Carriers are disciplining agents and/or terminating the licenses of those who are found to be selling policies as part of STOLI transactions. 3. Resources include Advanced Association of Life Underwriters, Estate Planning magazine, July 2008 edition (Stephan Leimberg and Kenneth Kingma) and M Financial Group. 29 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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