Tuesday, December 1, 2020

No. 400: Stranger-Originated Life Insurance—A Follow-Up to My Recent Blog Post About the Legislation in New Jersey

In No. 317 (June 13, 2019), I discussed developments that led to recent legislation in New Jersey prohibiting stranger-originated life insurance (STOLI). In No. 396 (November 2, 2020), I discussed the recent legislation in New Jersey, and said I was not aware of any other state in which STOLI is prohibited by law. In response, several readers called my attention to other states with laws prohibiting STOLI. That prompted me to investigate and prepare this further follow-up. The complimentary packages I offered in Nos. 317 and 396 remain available.

The New York State Prohibition
One reader shared with me some information about the New York State prohibition of STOLI. Effective in 2010, what are now sections 7814 and 7815 of the New York Insurance Laws prohibit STOLI. For the purposes of the prohibition, STOLI is defined as
Any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state.
The NAIC and NCOIL Model Laws
Another reader shared with me an article entitled "Deterring STOLI: Two New Model Life Settlement Acts." The article was in the July 2008 issue of the magazine Estate Planning. The authors were Kenneth W. Kingma and Stephan R. Leimberg.

The article discussed the adoption of model laws by the National Association of Insurance Commissioners (NAIC) in 2006, and the National Conference of Insurance Legislators (NCOIL) in 2007. As I went over the article, I had the impression that the NAIC model law frowns upon STOLI but does not include an outright prohibition of the practice. At the same time, I had the impression that the NCOIL model law not only frowns upon STOLI but also includes an outright prohibition of the practice. The article is in the complimentary package offered at the end of this post.

The Minnesota and Nevada Prohibitions
After reading the Kingma-Leimberg article, I wrote to some state insurance departments asking whether they impose statutory prohibitions on STOLI. Spokespersons representing Minnesota and Nevada responded to my inquiry.

The Minnesota spokesperson said the state prohibits STOLI and cited section 60A0783 of the 2012 Minnesota Statutes requiring an insurable interest. The Nevada spokesperson said the state prohibits STOLI and cited section 687B040 of the Nevada Revised Statutes requiring an insurable interest. Neither spokesperson was able to say whether their statutes were enacted in the wake of the NCOIL model law, but I think they were.

The Illinois Consumer Alert
In the course of preparing this follow-up, I stumbled across a "Consumer Alert" that was issued in January 2008 by what is now the Illinois Department of Insurance. The alert advised "consumers to proceed with caution when considering participation in a STOLI arrangement." The Department said that it "does not sanction or approve" such arrangements, and that "These transactions and parties to these transactions may be subject to the Illinois Insurance Code and other applicable laws in the State of Illinois." The alert also described the nature of STOLI arrangements. The alert is in the complimentary package offered at the end of this post.

Available Material
I am offering a complimentary 19-page PDF containing the Kingma-Leimberg article about "Deterring STOLI" (18 pages) and the Illinois Consumer Alert on STOLI (1 page). Email jmbelth@gmail.com and ask for the December 2020 package about STOLI.