On February 5, 2009, the Florida Office of Insurance Regulation (“FOIR”) released a report entitled, “Stranger-Originated Life Insurance and the Use of Fraudulent Activity to Circumvent the Intent of Florida’s Insurable Interest Law” (the “Report”), based on testimony and documentation presented public information hearing on the issue of stranger-originated life insurance which “[circumvent] the insurable interest laws” (“STOLI”) on August 28, 2008. It discusses transactions involving plans to initiate or originate a life insurance policy for the benefit of investors who have no insurable interest in the life of the insured and distinguishes such transactions from viatical settlements. The Report cautions that STOLI transactions may harm seniors in a number of ways:
- Seniors may exhaust their life insurance purchasing capability.
- The incentives, especially cash payments, may be taxable as ordinary income.
- Seniors may encounter unexpected tax liability from the sale of the life insurance policy.
- Seniors have to give the purchaser, and subsequent purchasers, access to their medical records when they sell their life insurance policy in the secondary market so that investors know the health status of the insured. The value of a life insurance policy in the secondary market is dependent on the life expectancy and health of the insured.
- Because life settlements lead to lower lapse rates and insurers, therefore, are more likely to pay death benefits, their underwriting profits may decline. As a result, STOLI may lead to an increase in life insurance rates for the over 65 population.
In addition to discussing the potential issues STOLI could cause, the 213 page Report includes a review of insurable interest law, Florida law governing viatical settlements, a transcript of the August 28 hearing, and a comparison of the NAIC and NCOIL Model Laws.