Bill takes aim at life insurance gimmick

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By NANCY HICKS/Lincoln Journal Star

The Nebraska Department of Insurance wants to stop the latest ghoulish investment gimmick, a new twist on life insurance that targets seniors, banking on the likelihood that they will soon be dead.

A legislative bill supported by the department targets what is called stranger-originated life insurance, or STOLI.

Here’s how STOLI works. A financial company solicits and pays a stranger, usually an elderly stranger, to buy a life insurance policy.  The soliciting company generally pays the stranger $1,000 or more, and it pays the premium on that policy — and eventually gets the death benefit.

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The companies generally target people 75 to 85, and the products are sometimes marketed as zero-premium life insurance policies, according to state Insurance Director Ann Frohman.

The person who buys the insurance names the beneficiary for the first two years. After that, the insured sells the policy to the soliciting company, generally in return for canceling the outstanding loan made to pay the premiums.

These insurance policies become part of life settlement-backed security marketed to investors. Some are now being pooled then divided into death bonds and sold to pension funds, college endowments and other professional investors.

The bill (LB853), based on a national model, would lengthen the two-year window before the policy could be sold to five years. That would discourage the practice because it would limit the profit companies could make with STOLIs, since more older policyholders would die during the five years, according to Frohman.

STOLIs pervert the traditional underlying principle that has guided life insurance for centuries: that life insurance provides financial protection for family members, a business and more recently a charity, according to life insurance department and industry leaders who supported the bill during a public hearing last week.

The idea is that you can’t insure against something you don’t have reason to care about.

STOLIs change that underlying principle and threaten both life insurance’s preferential tax treatment and premiums, according to supporters of the bill.

“The best thing about life insurance is that the death proceeds are income tax-free,” said Sen. Tom Carlson of Holdrege who has been in the life insurance business for decades. “And that characteristic has been preserved through all the years because life insurance is a product that is for the public good. It is not a commodity to be bought and sold.”

Converting insurance into a mere commodity threatens those tax benefits, said Terry K. Headley, president of Headley Financial Services in Omaha, who represented the National Association of Insurance and Financial Advisors-Nebraska, at the public hearing.

Insurance premiums also are based on the premise that a number of people will drop their policies, letting them lapse, he told senators. Since STOLIs reduce that lapse rate, their growing use could lead to premium increase, Headley said.

“This is about making sure that everyday Nebraskans have access to reasonably priced life insurance,” said Eric Dunning, the insurance department’s legislative liaison.

The proposed change in law would increase the state’s timeline between initial purchase and the ability to sell a policy from two to five years. During that period, an insurer can contest the legitimacy of a policy, which can’t be purchased simply to be resold, Headley explained.

Opponents, like Robert Wooley, with Coventry, the nation’s largest life settlement company, believe the bill and the lengthened ban on selling a policy takes away property rights from citizens who want to sell their life insurance. 

But policyholders could still sell for any reason after the five years. And they could sell it for a list of legitimate reasons during the five-year period, Headley explained. Legitimate exceptions include a policyholder who gets sick or has a terminal illness and needs money for health care and other bills, or an insured who is widowed or retires.

The list of exceptions protects people who no longer need the insurance for its original purpose, explained Carlson, who says he understands but is not comfortable with all of the “legitimate reasons.”

When a policy is sold to someone, it totally changes the view of life insurance, he said.

“The minute you buy that policy, you hope I die, and the quicker the better,” Carlson said. “Once it leaves the primary purpose and becomes a business transaction, then there is hope for death.

“I don’t like it.”

STOLIs go one step further.

“To me it (STOLI) is a macabre, sinister way to look at the life insurance business. Our products were never intended to be used in these types of ways,” Headley said.

Reach Nancy Hicks at 473-7250 or nhicks@journalstar.com.