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Investors and middlemen make such big profits buying seniors' life-insurance policies that they're enticing people to take out unneeded insurance expressly for quick resale. But their greed may be catching up with them.
Stranger Owned Life Insurance (STOLI) resembles playing the lottery when you know the winning numbers in advance. A broker or investor persuades an affluent person in his or her sixties or seventies to apply for a large life-insurance policy with the agreement to sell it soon, usually within two years. The investor lends the money to pay the premiums. So anything you clear would seem to be free and out of nowhere.
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STOLI got attention a few months ago after word spread that talk-show host Larry King had bought two policies totaling $15 million in death benefits and flipped them for $550,000 and $850,000. The investors clearly expect that King, who is 74 and has had serious heart problems, won't meet many more presidents before he dies. Yet King wasn't thrilled with his $1.4-million payoff; he sued for breach of fiduciary duty, claiming that he didn't realize the broker would get almost as much out of the transaction as he did, that he didn't know how the sale would be taxed, and that he didn't know creating and transferring the policies would make it difficult to buy additional life coverage (life insurers set limits based on income and assets).
But commissions aren't the only problem. Deals with strangers crowd the volume of policies chasing after investors and lower the amount people can get for legitimate life settlements. It's also against the point of insurance, which has preferential tax treatment, to protect those who would suffer financially if you die. Several states are changing their laws specifically to put an end to STOLI. North Dakota, for example, prohibits the sale of a life-insurance policy within five years of its issuance if you've borrowed to pay the premiums (often a red flag of STOLI transactions), except in certain circumstances, such as divorce, disability or the death of a spouse. About 30 other states are weighing either a two-year or five-year waiting period.
Insurance companies are trying to stem STOLI sales by asking applicants if they plan to sell the policy. Saying no and then doing it is fraud and could invalidate the insurance. Some companies are refusing to sell large life policies to anyone over a certain age. The aim is to keep the investors' money available for honest life settlements and to protect older people who really do need new insurance for estate taxes or other purposes, not because they're greedy.
ALSO SEE: Cash In on Your Life
POSTED BY: BKS (June 10, 2008 07:20 PM)
What is the role of the insurance agent in a STOLI transaction? You said a broker or investor persuades an affluent person to purchase insurance, don't you need a life insurance agent to apply for a policy? And if the policies are with high death benefits, don't the insurance companies do some type of investigation and underwriting to determine the premiums on the policy? I don't understand how STOLI could be profitable to investors if the insurance company is pricing the policy correctly--if my health is not good, don't I pay more in premiums because of my health? Does the insurance company negiotate on my premiums to make this work for the investors? Doesn't this make insurance companies money, the more they take in in premiums, the better it looks on their sales and profits, thus attracting more investors to the life company and more money to invest. I'm a little confused how my death benefit is profitable if my policy is underwritten properly.
POSTED BY: Isaac (June 16, 2008 05:40 PM)
Response to BKS. Actuaries take into account the lapse ratio, which has been aprox 85-90%.
These policies will not be lapsed.
POSTED BY: EWM (June 26, 2008 03:48 PM)
Larry King was not an example of a STOLI. He used his own funds to purchase insurance. His transactions were life settlements. The problem was his so-called broker went to only one funder,(CoventryFirst). Not shopping the policies around and negotiating a big commission produced the lawsuit.
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