The National Association of Insurance Commissioners (the “NAIC”) recently approved a number of significant revisions to its Viatical Settlements Model Act (the “VS Act”). Key portions are aimed at thwarting so-called “stranger-originated life insurance” (“STOLI”) transactions. These portions are referred to herein as the “STOLI Amendments.” The central legal issue that STOLI transactions present is the validity of insurable interest for life insurance policies in which investors have an interest. The NAIC chose to address this concern by amending the VS Act to regulate certain types of premium financed life insurance policies as viatical settlements rather than directly altering the codified insurable interest laws. Under current insurable interest laws, life insurance policies which fail to satisfy these laws are unenforceable wagering contrancts. However, the effect of the STOLI Amendments on insurable interest laws remains open to question.
Before analyzing the efficacy of these amendments, one must first understand what is STOLI. “STOLI” is a term used to denote the purchase of a new life insurance policy using a premium finance loan to fund payments of some or all of the insurance premiums for the policy. STOLI implies that such financing arrangements lack a valid insurable interest.