No, not that Stoli; Stranger Owned Life Insurance. We've actually discussed various forms of this concept before, but a quick recap is in order:
To understand STOLI, one must start with the concept of "insurable interest." Briefly, insurable interest means that one may expect to suffer a financial hardship if the insured person dies. An obvious example would be a spouse, or perhaps a key employee. It's important to note that, until now, it has been a given that insurable interest must exist at the time a policy is issued, but that requirement would subsequently go away.
When AIDS became so prevalent, a previously little-known concept, "viaticals," started to take off. Viatical contracts were a way for a dying person to sell their life insurance policy to someone else, generally through a broker, at a discounted rate. For example, one might sell a $100,000 life insurance policy for $45,000 cash. This benefited the insured, who may have had no one to whom he cared to leave the larger amount, and who wanted (or needed) a large sum of ready cash. As one might imagine, such a market was ripe for abuse, and various laws were enacted to limit the damage. Insofar as the primary beneficiaries of these plans were in the midst of a debilitating and fatal illness, this seemed an appropriate response.
Unfortunately, once that camel's nose was under the tent, the original nature of the life insurance contract was violated.
Let's step back for a moment, and discuss this unlikely sounding concept called STOLI. It refers to the sale of one's life insurance policy to someone who (apparently) has no insurable interest. This is beyond viatical settlements, and has many uses, some benign, some not so much. I've been unable to find any hard numbers regarding how many of these sales have actually taken place, how many insured's and their policies are affected. I daresay that's partly because it's such a miniscule part of the market, and rarely used. But because of a few high-profile cases abusing the idea, we now have the government effectively dictating to you how you may dispose of your own life insurance policy.
Think I'm exaggerating?
Suppose you wanted to sell your home to someone you didn't know, and the government forbade you from doing so? That would seem pretty silly, and beyond the authority of the state. But that's exactly what a life insurance policy really is: a piece of property. Permanent life insurance policies (e.g. whole life, universal life, etc) have "cash values," which are exactly the same as equity in one's home: one may borrow against the policy using its cash value exactly the way you can make a home equity loan (minus the fees, points and credit check, of course). Why would it be any less dangerous for the government to be empowered to dictate to whom we could sell our insurance policy than our home?
And yet, that's precisely the result of new legislation in Ohio. Yes, it seems like a blow against the "forces of evil," but it is in actuality a shrinking of what "private property" is supposed to mean. We've sacrificed a real right on a false premise.
And of course, the National Association of Insurance and Financial Advisors (a true oxymoron) provides the cheerleaders:
"STOLI transactions violate the essential social purpose of life insurance, which is protection...Life insurance was not intended to be used as a vehicle for financial speculation on human life” says NAIFA president Jeffrey Taggart, completely missing the point.
All this does is place an increasing burden on the insured, while relieving that same insured of a fundamental right.
Nice going.
To understand STOLI, one must start with the concept of "insurable interest." Briefly, insurable interest means that one may expect to suffer a financial hardship if the insured person dies. An obvious example would be a spouse, or perhaps a key employee. It's important to note that, until now, it has been a given that insurable interest must exist at the time a policy is issued, but that requirement would subsequently go away.
When AIDS became so prevalent, a previously little-known concept, "viaticals," started to take off. Viatical contracts were a way for a dying person to sell their life insurance policy to someone else, generally through a broker, at a discounted rate. For example, one might sell a $100,000 life insurance policy for $45,000 cash. This benefited the insured, who may have had no one to whom he cared to leave the larger amount, and who wanted (or needed) a large sum of ready cash. As one might imagine, such a market was ripe for abuse, and various laws were enacted to limit the damage. Insofar as the primary beneficiaries of these plans were in the midst of a debilitating and fatal illness, this seemed an appropriate response.
Unfortunately, once that camel's nose was under the tent, the original nature of the life insurance contract was violated.
Let's step back for a moment, and discuss this unlikely sounding concept called STOLI. It refers to the sale of one's life insurance policy to someone who (apparently) has no insurable interest. This is beyond viatical settlements, and has many uses, some benign, some not so much. I've been unable to find any hard numbers regarding how many of these sales have actually taken place, how many insured's and their policies are affected. I daresay that's partly because it's such a miniscule part of the market, and rarely used. But because of a few high-profile cases abusing the idea, we now have the government effectively dictating to you how you may dispose of your own life insurance policy.
Think I'm exaggerating?
Suppose you wanted to sell your home to someone you didn't know, and the government forbade you from doing so? That would seem pretty silly, and beyond the authority of the state. But that's exactly what a life insurance policy really is: a piece of property. Permanent life insurance policies (e.g. whole life, universal life, etc) have "cash values," which are exactly the same as equity in one's home: one may borrow against the policy using its cash value exactly the way you can make a home equity loan (minus the fees, points and credit check, of course). Why would it be any less dangerous for the government to be empowered to dictate to whom we could sell our insurance policy than our home?
And yet, that's precisely the result of new legislation in Ohio. Yes, it seems like a blow against the "forces of evil," but it is in actuality a shrinking of what "private property" is supposed to mean. We've sacrificed a real right on a false premise.
And of course, the National Association of Insurance and Financial Advisors (a true oxymoron) provides the cheerleaders:
"STOLI transactions violate the essential social purpose of life insurance, which is protection...Life insurance was not intended to be used as a vehicle for financial speculation on human life” says NAIFA president Jeffrey Taggart, completely missing the point.
All this does is place an increasing burden on the insured, while relieving that same insured of a fundamental right.
Nice going.
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