Premium Financing, Life Settlements

and Insurable Interest Law

John P. Gerni
ACLI Regional Vice President
Presentation to the OCI Life Advisory Council
February 5, 2008
Copyright American Council of Life Insurers 2006
What ’s in an acronym?
What’s

ƒ COLI: Corporate Owned Life Insurance

ƒ BOLI: Bank Owned Life Insurance
ƒ CHOLI: Charity Owned Life Insurance
ƒ LILACS: Life Insurance Life Annuity Contracts
ƒ IOLI: Investor Owned Life Insurance
ƒ SOLI: Stranger Owned Life Insurance
ƒ STOLI: Stranger Originated Life Insurance
ƒ SILI: Stranger Initiated Life Insurance
ƒ IILI: Investor Initiated Life Insurance
Copyright American Council of Life Insurers 2006
Insurable Interest: The Heart of Life Insurance

ƒ Widows and Orphans

ƒ Key Man
ƒ Charities
ƒ Trusts

Copyright American Council of Life Insurers 2006

 Insurable Interest: Sample Statute: Wisconsin
Insurance Law § 631.07
Insurable interest and consent.
(1) INSURABLE INTEREST. No insurer may knowingly issue a policy to a
person without an insurable interest in the subject of the insurance.
(2) CONSENT IN LIFE AND DISABILITY INSURANCE. Except under sub.
(3), no insurer may knowingly issue an individual life or disability
insurance policy to a person other than the one whose life or health is at
risk unless the latter has given written consent to the issuance of the
policy. Consent may be expressed by knowingly signing the application
for the insurance with knowledge of the nature of the document, or in
any other reasonable way.

Copyright American Council of Life Insurers 2006

 Insurable Interest: Sample Statute: California
Insurance Code § 10110.1:
(a) An insurable interest, with reference to life and disability insurance, is
an interest based upon a reasonable expectation of pecuniary advantage
through the continued life, health, or bodily safety of another person and
consequent loss by reason of that person’s death or disability or a
substantial interest engendered by love and affection in the case of
individuals closely related by blood or law.
(b) An individual has an unlimited insurable interest in his or her own life,
health, and bodily safety and may lawfully take out a policy of insurance
on his or her own life, health, or bodily safety and have the policy made
payable to whomsoever he or she pleases, regardless of whether the
beneficiary designated has an insurable interest.
California Insurance Code § 280: “If the insured has no insurable interest,
the contract is void.”

Copyright American Council of Life Insurers 2006

 The Viatication of Life Insurance

ƒ The AIDS Epidemics in the 1980s

ƒ The viatical settlement market 1990s
ƒ From Viatical to Life Settlements
ƒ STOLI and Premium Financing

Copyright American Council of Life Insurers 2006

 What is STOLI?
ƒ An individual is assisted in obtaining life insurance on his or
her own life through a non-recourse loan from the third-party
investor to the insured.
ƒ Generally, the investor “loans” the amount of the premiums
for two years to the insured. At the end of two years, the
insured transfers the policy to the investor in exchange of
forgiveness of “loan.” In some cases, the insured receives
cash payment in connection with the transaction.
ƒ Insurable interest?
ƒ Implications with public policy
Copyright American Council of Life Insurers 2006
 Examples of Life Settlements

EXAMPLES OF LIFE SETTLEMENTS

Face Value CSV Age Settlement
$ 500,000. 0 70 $ 116,340.
$ 750,000. $142,000. 76 $ 225,000.
$ 4,000,000. $ 90,000. 82 $1,430,000.
*$10,000,000. $800,000. varied $3,500,000.

*Aggregate of key man policies

Source: SeniorJournal.com

Copyright American Council of Life Insurers 2006

Life Settlements – A Product Life Cycle

Source: National Underwriter

Copyright American Council of Life Insurers 2006

Life Settlement Securitization

Source: A.M. Best

Copyright American Council of Life Insurers 2006

 Growth of the Settlement Markets

Size of the Life Settlements Market And Some Say It Could Top $125 Billion by 2015

$140

$10.0

$9.0 $120

$8.0
$100
$7.0

$6.0 $80

$5.0
$60
$4.0

$3.0
$40

$2.0

$20
$1.0

$-
2001 2002 2003 2004 2005 $-
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Life Settlement Institute, Lehman Brothers Estimates

Copyright American Council of Life Insurers 2006

 Settlement Deconstruction of Life Insurance

ƒ From Life Settlements to LILACS

ƒ Arbitrage or Vampirism
ƒ Unlocking Values: Lapse Underwriting
ƒ Investment versus Insurance Values

Copyright American Council of Life Insurers 2006

 The Response to STOLI

ƒ Regulatory Guidance
ƒ NAIC Viatical Settlement Model Act Amendments
ƒ NCOIL Life Settlements Model Act
ƒ Federal Excise Tax

Copyright American Council of Life Insurers 2006

 Regulatory Activity

ƒ Utah Bulletin 2006-3. Premium financing through a non-recourse loan is

not compliant with insurable interest statute.
ƒ Idaho Bulletin 07-03. Arrangements may violate Idaho laws that
requirean insurable interest in the life of an insured and that prohibit
rebates or otherinducements to purchase insurance unless the
inducement is set forth in the policy.
ƒ Consumer Alerts issued by Illinois, Ohio, Pennsylvania, North Carolina,
and California and FINRA.
ƒ New York Opinions: A valid insurable interest does not exist under the
New York insurance law.
ƒ Zero-Premium Financing Investigations: Vermont, Georgia, and
Alabama
ƒ U.S. Treasury response to U.S. Congress on potential tax consequences
Copyright American Council of Life Insurers 2006
 NAIC Viatical Settlement Model Act

ƒ Deters STOLI by prohibiting settlement of life insurance policies for five

years from policy issuance when the policy is purchased for the purpose
of selling into the secondary market
ƒ Exempts legitimate life settlement transactions based on insurable
interest and financing on insurance values
ƒ “Pervasive Fraud” that address settlement broker conflicts of interest and
require settlement broker compensation disclosure.
ƒ Requires disclosures to insured, insurers, and insurance regulator
ƒ Expands regulatory discretion beyond settlements involving terminally or
chronically ill individuals to invalidate transactions

Copyright American Council of Life Insurers 2006

NCOIL Life Settlements Model Act

ƒ Does NOT have 5 year prohibition language.

ƒ Definition of “life settlement contract” also captures trust
arrangements where STOLI has been masked.
ƒ Definition of “Stranger Originated Life Insurance”
ƒ Violation of STOLI is a fraudulent settlement act.
ƒ Disclosures to consumer, insurer, and insurance regulator

Copyright American Council of Life Insurers 2006

 Federal Excise Tax Elements
ƒ Applies to “specified acquisition of a life insurance contract”
within 5 years of issue
ƒ Tax = 100% of consideration paid to acquire or continue
interest in a policy
ƒ Ten categories of exclusions based on state insurable
interest law
ƒ Disqualified Persons
ƒ Foreign Trusts

Copyright American Council of Life Insurers 2006

 Legislative & Regulatory Outlook

ƒ Federal Legislative Outlook

ƒ State Legislative Outlook
ƒ State Regulatory Outlook

Copyright American Council of Life Insurers 2006