Premium Financing, Life Settlements and Insurable Interest Law

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1 Premium Financing, Life Settlements and Insurable Interest Law John P. Gerni ACLI Regional Vice President Presentation to the OCI Life Advisory Council February 5, 2008

2 What s s in an acronym? COLI: Corporate Owned Life Insurance BOLI: Bank Owned Life Insurance CHOLI: Charity Owned Life Insurance LILACS: Life Insurance Life Annuity Contracts IOLI: Investor Owned Life Insurance SOLI: Stranger Owned Life Insurance STOLI: Stranger Originated Life Insurance SILI: Stranger Initiated Life Insurance IILI: Investor Initiated Life Insurance

3 Insurable Interest: The Heart of Life Insurance Widows and Orphans Key Man Charities Trusts

4 Insurable Interest: Sample Statute: Wisconsin Insurance Law Insurable interest and consent. (1) INSURABLE INTEREST. No insurer may knowingly issue a policy to a person without an insurable interest in the subject of the insurance. (2) CONSENT IN LIFE AND DISABILITY INSURANCE. Except under sub. (3), no insurer may knowingly issue an individual life or disability insurance policy to a person other than the one whose life or health is at risk unless the latter has given written consent to the issuance of the policy. Consent may be expressed by knowingly signing the application for the insurance with knowledge of the nature of the document, or in any other reasonable way.

5 Insurable Interest: Sample Statute: California Insurance Code : (a) An insurable interest, with reference to life and disability insurance, is an interest based upon a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety of another person and consequent loss by reason of that person s death or disability or a substantial interest engendered by love and affection in the case of individuals closely related by blood or law. (b) An individual has an unlimited insurable interest in his or her own life, health, and bodily safety and may lawfully take out a policy of insurance on his or her own life, health, or bodily safety and have the policy made payable to whomsoever he or she pleases, regardless of whether the beneficiary designated has an insurable interest. California Insurance Code 280: If the insured has no insurable interest, the contract is void.

6 The Viatication of Life Insurance The AIDS Epidemics in the 1980s The viatical settlement market 1990s From Viatical to Life Settlements STOLI and Premium Financing

7 What is STOLI? An individual is assisted in obtaining life insurance on his or her own life through a non-recourse loan from the third-party investor to the insured. Generally, the investor loans the amount of the premiums for two years to the insured. At the end of two years, the insured transfers the policy to the investor in exchange of forgiveness of loan. In some cases, the insured receives cash payment in connection with the transaction. Insurable interest? Implications with public policy

8 Examples of Life Settlements EXAMPLES OF LIFE SETTLEMENTS Face Value CSV Age Settlement $ 500, $ 116,340. $ 750,000. $142, $ 225,000. $ 4,000,000. $ 90, $1,430,000. *$10,000,000. $800,000. varied $3,500,000. *Aggregate of key man policies Source: SeniorJournal.com

9 Life Settlements A Product Life Cycle Source: National Underwriter

10 Life Settlement Securitization Source: A.M. Best

11 Growth of the Settlement Markets Size of the Life Settlements Market And Some Say It Could Top $125 Billion by 2015 $140 $10.0 $9.0 $120 $8.0 $7.0 $100 $6.0 $80 $5.0 $4.0 $60 $3.0 $40 $2.0 $1.0 $20 $ $ Source: Life Settlement Institute, Lehman Brothers Estimates

12 Settlement Deconstruction of Life Insurance From Life Settlements to LILACS Arbitrage or Vampirism Unlocking Values: Lapse Underwriting Investment versus Insurance Values

13 The Response to STOLI Regulatory Guidance NAIC Viatical Settlement Model Act Amendments NCOIL Life Settlements Model Act Federal Excise Tax

14 Regulatory Activity Utah Bulletin Premium financing through a non-recourse loan is not compliant with insurable interest statute. Idaho Bulletin Arrangements may violate Idaho laws that requirean insurable interest in the life of an insured and that prohibit rebates or otherinducements to purchase insurance unless the inducement is set forth in the policy. Consumer Alerts issued by Illinois, Ohio, Pennsylvania, North Carolina, and California and FINRA. New York Opinions: A valid insurable interest does not exist under the New York insurance law. Zero-Premium Financing Investigations: Vermont, Georgia, and Alabama U.S. Treasury response to U.S. Congress on potential tax consequences

15 NAIC Viatical Settlement Model Act Deters STOLI by prohibiting settlement of life insurance policies for five years from policy issuance when the policy is purchased for the purpose of selling into the secondary market Exempts legitimate life settlement transactions based on insurable interest and financing on insurance values Pervasive Fraud that address settlement broker conflicts of interest and require settlement broker compensation disclosure. Requires disclosures to insured, insurers, and insurance regulator Expands regulatory discretion beyond settlements involving terminally or chronically ill individuals to invalidate transactions

16 NCOIL Life Settlements Model Act Does NOT have 5 year prohibition language. Definition of life settlement contract also captures trust arrangements where STOLI has been masked. Definition of Stranger Originated Life Insurance Violation of STOLI is a fraudulent settlement act. Disclosures to consumer, insurer, and insurance regulator

17 Federal Excise Tax Elements Applies to specified acquisition of a life insurance contract within 5 years of issue Tax = 100% of consideration paid to acquire or continue interest in a policy Ten categories of exclusions based on state insurable interest law Disqualified Persons Foreign Trusts

18 Legislative & Regulatory Outlook Federal Legislative Outlook State Legislative Outlook State Regulatory Outlook

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