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Blurring the Lines Between Truth and Myth

Blurring the Lines Between Truth and Myth

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Published by: InsuranceStudies_ISI on Feb 25, 2010
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www.InsuranceStudies.org | Life Insurance Selement Series Edion No. IV
Life Insurance Selement Series Edion No. IV
Blurring the Lines BetweenTruth and Myth
What is a life selement?What is a STOLI?What is right for you?
By: Christopher Kampa, Director of Research ISI
February 25, 2010
A Request for ObjecveInformaon to Help Seniors
For the benet of consumers, we are asking all publishers inthe media to edit out fabricaons and sensaonalism in arclesthat describe nancial, legal, and rerement maers forseniors and to assure such arcles are thoroughly researchedand accurately reported. We are asking all publishers to helpeducate consumers with fair and useful knowledge. It is to thebenet of consumers that they are allowed to make decisionsbased on factual informaon.The recent upsurge in media coverage on topics related to sellinglife insurance policies (“life selements”) renews our aenonto the study ISI completed in September, 2009, “Portrayalof Life Selements In Consumer-Focused Publicaons.” Inthis study, it was observed that “informaon about the lifeinsurance secondary market (LISM) available to seniors is bothsparse and inconsistent.” While some recent media arclesdefend the valued opon enjoyed by a few seniors to sell alife insurance policy to investors,
other arcles blur the linesbetween truth and myth of the life selement opon and whatit can actually provide to seniors.
Misconstrued informaon about Stranger Originated LifeInsurance (“STOLI”) policies, such as in a recent arcle in theACLI News Release,
is a clear example of erroneous reporng.Misleading arcles like this leave readers misinformed,confused, and distrusul of something that should make themfeel good. Selling a life insurance policy as a life selement isnot right for everyone, but how can the consumer considerthe opon without fair and objecve informaon? There is afundamental need to educate consumers, parcularly seniors,about the advantages and disadvantages of life selementtransacons. But disbursing fear and emoonally-chargedlanguage in unfair, misinformed, misguided, and distrusularcles is being disingenuous to those who desire and need tochoose the best opons available to manage their rerementand estate nances.
Understanding the Investors’ Risks
The concept that investors are “beng on death” is wrong,extraneous, and intenonally designed to establish fear in thereaders’ minds. Death is certain for everyone. In all walks of life there are situaons where early or later death can havevarious impacts on subsequent events. Some survivors willbenet more or less, e.g., inheritance, business control, newfreedoms, or polical inuence. So, why describe investors inlife insurance policies as being any dierent than insurers whoare beng on the mortality of the insured they cover with lifeinsurance policies and annuies?The premise for accumulang a porolio of life insurancepolicies is essenally the same as wring a series of annuitycontracts. If the annuity provider were to write a single annuityon just one life, it could be argued that they were indeed bengon when that person will die. If the person dies sooner, theannuity writer experiences a greater prot. If that person liveslonger, the annuity writer could end up losing money. Whilethis could be considered a form of “beng on death,” mostpeople see this as a nancial business transacon designed toenhance the annuitant’s welfare in exchange for a risk weightedprot for the insurer. And likewise, life insurance selementsare designed to enhance the seller’s welfare in exchange for arisk weighted prot for the investor.
The concept that investors are “beng on death”is wrong, extraneous, and intenonally designedto establish fear in the readers’ minds.
www.InsuranceStudies.org | Life Insurance Selement Series Edion No. IV
Contnued from page 1
To avoid the high win/loss mortality risk represented by a singlelife, investors in life insurance policies and annuity providersseek to spread their nancial risk over a large number of lives.For example, when an annuity writer amasses a large porolioof contracts using mortality projecons the gains on policiesthat mature earlier than expected will be oset by the losseson those that mature later than expected. The mortalityesmaons, which are derived from a mortality curve, becomeincreasingly more accurate and reliable as more contracts areadded to a porolio. This accomplishes the goal of reducingrisk. Investors in life insurance policies share many nancialprot/loss risks with insurers.Annuity writers and legimate investors in life insurancepolicies do not wish to “bet the farm” on a handful of policiesor contracts. They are not “beng on death,” but ratherthey are carefully oering nancial transacons that projectprots based on normalized mortality tables. They do thiswhile providing nancial payments in lump sums or as annuitystreams that provide valuable benets to the policy sellersand the annuity purchasers. These are designed to be win-wintransacons.
Understanding and Avoiding STOLI
Arcles reporng on Stranger Originated Life Insurance(“STOLI”) oen confuse legimate life selement pracceswith illegal STOLI transacons. Purveyors of such myths areeither woefully misinformed, poorly read, or are intenonallyusing deceiul taccs to imply that life selement transaconsor life selement rms are illegimate. This is wrong. Likethe naon’s prominent insurers and banks, the prominentlife selement providers, brokers, agents, and investors donot seek to circumvent laws or take advantage of loopholesin the system. They work within the framework of establishedstatutes and case law to provide legimate property rights tothose wishing to sell their life insurance policies.A life selement is a legal transacon whereby the owner of a life insurance policy sells his or her life insurance policy inreturn for an amount that exceeds the cash surrender value.In contrast, a STOLI is an illegal transacon where a thirdparty, authorized to sell life insurance policies but having no“insurable interest” in the insured, convinces a person to takeout a life insurance policy with an agreement that the thirdparty will assume ownership of the policy in return for somesort of compensaon. If that sounds complicated, it is, and itshould be avoided.The prominent operators in the life selement industryadamantly oppose STOLI and have sought laws and regulaonsto stomp out STOLI acvies. Already, the refusal of lifeinsurance policy investors to purchase policies that come fromSTOLI transacons is helping to stop the pracce. However,for a STOLI to occur a life insurance sales agent has to enablethe insured to submit a policy applicaon to the insurer andthe insurer has to issue the policy. This is where fraudulentSTOLI acvies begin. This is where STOLI transacons must
be stopped.
Consumers need to understand how to idenfy a STOLItransacon. Most simply, if a life insurance sales agent suggeststhat you should consider subming an applicaon for a largepolicy ($1,000,000 or more) and you queson your ability to jusfy or pay for such a policy, start quesoning the agent’sintent. If the agent or some associate of the agent suggeststhat they will guarantee payment of the premiums and willundertake to get the policy issued, be wary. If the agent ortheir associates suggest that you create a special enty toown the policy along with the execuon of an agreement thatdetermines who will be the owner of the policy, and/or theyoer some compensaon or special consideraon for yourparcipang in the transacon, walk away.
The Insurance Studies Instute
ISI is a non-prot research think-tank focusedon: a) researching and analyzing challenges andopportunies within the many paradigms of insurance based risk management; b) publishingresearch ndings on industry relevant topics; c)educang industry stakeholders, public policymakers and consumers in insurance basedrisk management, and advancing relatedscholarship; and, d) promong dialogue tofoster industry advancements, fair public policyand greater risk protecon for consumers.
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