Lovendusky on Illicit Life Insurance Settlements

Lovendusky on Illicit Life Insurance Settlements

The life insurance marketplace is witnessing an aggressive effort by speculators to undermine insurance principles with illicit life insurance settlements. Senior citizens are purchasing life insurance policies for the sole purpose of selling the death benefits to investors who have no insurable interest in the seniors. The transactions are structured in a way to avoid insurable interest statutes and deceive insurance companies as to the true owners and beneficiaries of the policies.

State legislators and regulators are responding to the issue in several ways. These include: reasserting insurable interest requirements; extending the settlement prohibition period; requiring policy applicants to disclose plans to settle policies; identifying stranger-originated life insurance (STOLI) as insurance fraud; and allowing life insurers unlimited time to contest STOLI-related policies.

In addition to the legislative activity, the emergence of STOLI will lead to substantially more litigation. This litigation will likely lead judges to revitalize long-standing insurance principles, including insurable interest and exceptions to contestability limitations for fraud. 

The treatise "Illicit Life Insurance Settlements," written by Michael Lovendusky, addresses the rapidly evolving legal, legislative and economic issues surrounding STOLI. It begins with a short history of speculation on the investment value of life insurance policies and how it led to STOLI. The treatise addresses the interplay between insurable interest and property rights as well as how certain premium financing schemes contribute to STOLI. It also explores the tension between incontestability periods and the right of insurance companies to challenge transactions in which a true insurance interest did not exist at the outset.

The treatise explains why existing insurable interest laws are insufficient to defend against STOLI. It then summarizes in detail responses to STOLI developed by the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL).

The treatise is fully documented with references to judicial opinions, ongoing litigation, state statutes and model laws.
[Editor’s Note: Illicit Life Insurance Settlements, written by ACLI’s Michael Lovendusky, appears in the October 2008 issue of New Appleman on Insurance: Current Critical Issues.
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