Tuesday, January 04, 2011

STOLI Ooops!

A few weeks ago, we wrote about the newest "twist" in Stranger Owned Life Insurance (STOLI). One of the conclusions we drew was that the only real "losers" in these schemes were "the poor saps who bought into this idea, and forked over $50,000 (minimum!) to do so."

We stand corrected:

"New investor lawsuits are emerging amid the wreckage of an investment boom in life-insurance policies that spectacularly collapsed ... Since the bust in the market, insurers have portrayed themselves as the victims."

[ed: the rest of the story is behind a $link]

And, having played the victim card, they're raising the stakes: over the past couple of years, insurers have filed hundreds of suits and agitated state regulators to clamp down on these after-market sales. Their rationale is that the actuarial assumptions on which these plans were based are somehow negated by the change in ownership of the plans.

I call BS: the nature of the risk hasn't changed one iota; John Doe is still John Doe, and his health and mortality risk is what it is regardless of who owns the policy. The idea that he'll meet an untimely demise at the hands of an unhappy investor is silly; the law's very clear that one can't profit from one's crimes in that way.

And of course, it's not just the insurers playing that card, "suits also have been filed by relatives of some of the deceased elderly, alleging that death benefits belong to the family members."

No, they do not. The death benefit belongs to the named beneficiary, which may well have been a family member (or members), but the owner of the policy makes that call, not his kids. Yes, an "irrevocable beneficiary" would have those rights, but then if there was such, the transaction couldn't have been completed in the first place.

And then there's this egregious misstatement: "State insurable-interest laws require an insurance buyer to have a bigger stake in the insured person's continued well-being than in his death."

No, they don't: "insurable interest" is only relevant at the time of application. Once the policy is issued, it is no longer relevant, or applicable. It's Insurance 101 stuff, and the media can't even get that right.

Now, as to the propriety and/or appropriateness of these schemes, I'll leave that to our readers' sensitivities. But the bottom line is that there's nothing inherently illegal, immoral or fattening about them.

[Hat Tip: FoIB Holly R]
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