State legislatures and insurance regulators have been working to regulate the secondary life insurance markets, particularly in the past few years, but the collapse of the money markets seems to have effectively slowed the brisk pace of STOLI.
But Lee Covington, general counsel for the Association for Insured Retirement Solutions, says the practice is still very much alive. Indeed, cash-strapped policyholders are more likely to scrounge for money in the current environment by selling their policies to interested investors, he said.
The disintegration of wealth over the past year has prompted more policyholders to take a second look at selling their life insurance policies on the secondary market, says Doug Head, executive director of the Life Insurance Settlement Association.
“There have been more reasons … for consumers to look to their assets in these difficult times, and try to see what they might realize for an asset in the secondary market,” he said, ticking off a few reasons: “Bernie Madoff stole [their] money, the economy is in a ditch, etc., etc.”
Head stresses that selling one’s insurance policy can be a good choice, and many policyholders with short life expectancies or few potential beneficiaries find it’s the best option to keep them comfortable in their lifetimes.
Sinister Sale
Stranger-originated life insurance, however, is the more sinister version of the concept, in which a third party will sell a policy with the direct intent of having the policyholder re-sell it back out – the party that buys the policy also has a financial stake in that person’s early demise.
It’s not just morbid, experts say – that setup is often a blatant scam, where the policy application is riddled with lies that inflate the person’s life expectancy and their wealth, thereby defrauding the insurance company, said Gerard Rocchi, senior vice president with New York Life.
These policies’ profitability depends on the securities market, which has suffered a significant decline in recent months. But Rocchi and others say they’re still seeing scams crop up, and STOLI debates are still raging in a number of state’s legislatures, including Massachusetts’.
A House bill, sponsored by Norfolk Rep. Ronald Mariano, sets licensing and education requirements for brokers involved in the secondary life insurance market, outlines the disclosures brokers and investors have to make to would-be policyholders, allow insurers to more easily reject applicants who they find suspect, among other things.
Mariano, a member of the Financial Services committee, said the issue took its time getting to Beacon Hill.
“Certainly I wasn’t aware of it,” he said, noting that the issue seems to have bubbled up in just the past few years.
STOLI hasn’t been a scene-stealing issue in the State House this session – Mariano himself hadn’t revisited his legislation since drafting it late last year – but the representative said the bill was crafted with the intent to stop unscrupulous practices while not preventing policyholders from selling their insurance if it was honestly come by and made financial sense to sell.
“There are instances and there are very real needs out there for folks to sell their life insurance … we have to be mindful of that. Circumstance changes, especially in this market,” Mariano said.
Rocchi and Covington spoke on STOLI at a Financial Industry Regulatory Authority conference in Boston this month, outlining the regulatory battles and ways in which insurers can keep an eye out for shifty goings-on. Rocchi said many STOLI transactions wildly inflate a person’s income, such as a case where an individual tried to take out a $10 million policy, yet upon investigation was found to be living in public housing.
In other cases, insurers can sniff out a rat by checking if the applicant has applied with a number of companies, he said – frequently, other insurers will be working on an applicant from the same person.
Lawmakers across the country have gotten into heated battles on the topic, and regulatory agencies themselves are often at odds as to how to regulate it, Covington said. Each state has a different set of regulations regarding the secondary market, and some bills have been killed by lawmakers’ inability to come to consensus on how to regulate it.
“It’s probably one of the most hotly contested insurance issues that I’ve seen,” Covington said.
S
tranger-originated life insurance helps investors and brokers profit from policyholders’ re-sold insurance policies, particularly if those policyholders die much sooner than expected; now, some financial analysts are declaring that the highly controversial practice is itself on life support.
