LISA: Myths and Facts

Myths and Facts

State legislators have an opportunity to take a leading role in protecting consumers from abuse by insurance companies, sales persons, and scammers while protecting the traditional value and social purposes of life insurance. Abuses include situations where consumers are induced to engage in STOLI in violation of existing insurable interest laws. In some cases, under the guise of "fighting fraud," consumers' rights to insurance property are violated.

STOLI uses life insurance as a vehicle for improperly creating policies to wager on human life. STOLI is opposed by both the Settlement Industry and the Insurers.

Myth
NAIC’s proposal would not prevent consumers from selling their life insurance policies for five years.

Fact
The five-year settlement moratorium in the NAIC Model Act is broad and poorly written. If this provision were strictly limited to STOLI transactions, the current controversy would not exist. The provision takes a back door - transactional approach attacking all life settlements, not merely STOLI. For example, the moratorium applies to consumers who purchased their policies with their own funds even if they were not funding exclusively with unencumbered assets. That odd phrase is not defined in the Model. This moratorium would wrongly apply to consumers who, in an effort to better inform themselves, sought out an evaluation for settlement. This is the equivalent of punishing consumers for appraising a house before buying they purchase it.

In addition, this provision would apply to consumers who want to sell their policies due to a change in economic circumstances, such as an economic collapse, or changing tax law. The provision does carve out a few special circumstances such as for terminal illness. It also fails to include circumstances included in the NCOIL Model, such as getting fired from a job, unexpected loss of income, or mental disability. Oddly, the NAIC Model includes the sale privilege for potentially engineered acts like divorce or retirement or disposal of interest in a closely held corporation. Suggestions that the NAIC model imposes a blanket five-year moratorium and a shift of the burden of proof to the consumer seeking to sell a policy are absolutely correct.

Myth
NAIC’s proposal does not interfere with the property rights of life insurance policy owners.

Fact

The property rights of policy owners are not protected. In testimony to the Ohio legislature, friends of Big Insurance have argued that the burden of proving the propriety of a life settlement should be shifted to the seller and to the buyer and that the insurance contract itself could be challenged. Big Insurers have challenged the historic rights of assignment in the courts, and lost. They are seeking to restrict those rights in legislation. The real issues are property rights and consumer rights in a changing world. Nobody but Big Insurance is seeking to diminish the authority of state legislators to regulate insurance activity, and life settlements.

Though legislators can limit the use of insurance and the rights of consumers in sale of life insurance policies, they should do so with great respect for the rights of consumers, not simply to protect the interests of insurers.

Since the turn of the century, every United States Supreme Court decision that has dealt with this issue has clearly recognized the rights of consumers to assign their insurance property. Justice Holmes, in 1911, stated that insurance was, “one of the best recognized forms of investment and self-compelled savings”. Public policy concerns that arise from using life insurance outside of the original, narrow purpose for which it was purchased, were resolved long ago with innovative products like Company Owned Life Insurance (COLI) and Whole Life Insurance. These products involve far more than straight insurance risk arrangements. Justice Holmes explained that if “an honest contract is sold in good faith”, no other party should interfere. This is the essence of good public policy in a free market. Insurers have repeatedly asserted that they can manage risk and, with good underwriting, identify improper contracts. Clearly, there is no need for the Law to interfere with consumer rights to protect insurers.

Myth
Big Insurance is not trying to derail the life settlement market for life insurance policies.

Fact

Though a number of life insurance companies are themselves participating in the life settlement market, some of the “old bulls” of insurance (the same huge companies who have historically resisted every advance in product design or innovation) are now fighting life settlements, just as they fought universal life, marketing changes, and the old “viatical settlements.” These old fashioned companies believe that the life settlement market threatens their dominant relationship with producers and consumers, so they prohibit their producers from even discussing the settlement option with their clients. They prefer lapse and/or surrender while resisting calls to explain settlements to consumers when they are appropriate. They reason away this lack of consumer disclosure by alleging that they should not “advertise for a competing industry”.

Though some life insurance companies that participate in the life settlement market support the NAIC Model Act and the five-year moratorium, they do so under great pressure from their colleagues. Why? Because peer pressure rules over consumer rights in the ranks of the Big Insurance and agent groups who do their bidding. Irrational fear by old-timer executives that life settlements will interfere with the focus on “selling the core product” or that consumers will “take advantage” because they are now informed of their rights, causes some insurers to battle and resist settlements, despite the active participation in the market of more enlightened others. They have worked themselves up into an irrational (and potentially self-fulfilling) fear that recognition of the parallels between improper STOLI activity and current practices in COLI sales will undermine the tax advantages of life insurance.

While asserting loudly that the “purpose of life insurance, which is protection” is being undermined, they sell insurance as an investment. They also fail to realize that the NAIC Model interferes with the value of life insurance by targeting far more than abusive STOLI transactions.

Myth
Life insurance companies are not using STOLI as a stalking horse to undermine all life settlements because they profit from high lapse rates.

Fact

Communications from insurers on this issue have been inconsistent, making it difficult to ascertain the truth. According to LIMRA International, the lapse rate for the types of policies most likely to be settled is only 10 percent. Despite this, a prominent leader in a sophisticated producer group told Ohio legislators that “these transactions increase the cost and difficulty of obtaining coverage for older Americans” and “drive up the cost of insurance for all other policyholders”. He further argued that “for a healthy 70 year-old male, the cost of permanent insurance has increased 3% to 6% in the last 4 years”.

LISA is unable to know which view is the truth, but the use of one argument over another according to the audience is bizarre. We do know that, according to a recent study, sales to the elderly have increased dramatically * and that fact may be driving much of current insurance sales increases. If these extensive sales lapse, or are surrendered in the near future, insurers will reap a windfall profit at the expense of the seniors to whom they have so aggressively marketed.

*From 2000 to 2005, there was a $6.6 billion increase in exposures in the TOAMS studies at issue ages 75 and above, which reflects an overwhelming increase in sales activity at the very high issue ages. In fact, for some companies, sales at issue ages over 70 represent 30% of all Universal Life premiums sold, a statistic unheard of five years ago.