STOLIs on the rocks in N.H.
New Hampshire has enacted one of the nation’s toughest laws against an esoteric, and controversial, form of life insurance.Under House Bill 660, stranger-originated life insurance, or STOLI, is now illegal in New Hampshire. The measure, known as the “Life Settlements Act,” took effect June 14 after Gov. John Lynch signed it into law. New Hampshire’s new law has “some of the strongest protections in the nation against STOLI,” Kate Kiernan, American Council of Life Insurers' senior counsel for state relations, told InsuranceNewsNet.com, an online industry publication. At its most basic, STOLI policies involve a three-way transaction. A broker or agent (the “stranger” in stranger-originated policies) approaches a customer to take out an expensive insurance policy. After a waiting period – previously two years, now five under HB 660 – the insured then sells the policy to an investor or group of investors. The insured receives a percentage of the face value, once the policy is sold on the secondary market to the investors. Investors make their money when the policy is paid out upon the death of the insured or when it is sold to other investors. The insurance agent earns a commission. In theory, everybody wins. In reality, STOLIs are much more complicated – and now illegal in New Hampshire, said Barbara Richardson, director of operations and fraud of the New Hampshire Insurance Department. “Life settlement products in and of themselves are legitimate products in most cases,” she said. “It is still perfectly legal to buy a life insurance policy from a broker and sell it yourself to investors, but when someone else approaches you to buy one, that’s illegal. That’s the ‘stranger.’” While there is an actual life insurance product in a STOLI, the buying and selling of the policy can land in a gray area between an insurance policy and a security, putting it into a no-man’s land of regulation. “New Hampshire had no regulation at all on STOLIs,” said Richardson. “We saw what was happening in other states, and we didn’t want it to happen here.” The new law has additional safeguards to protect both policyholders and investors. The contestability period, a waiting period meant to support insurable interest on the policy during which a policy can't be sold, has been lengthened from two years to five years. “If the insured has a true hardship, they can still sell their policy even if they are in that five-year waiting period,” said Richardson. “They are not locked in.” Investors also have protections in that they have the right to ask about medical well-being of the insured, although the actual identity of the insured or insureds are not usually disclosed to the final investors. As arcane as STOLIs sound, life settlement products as a whole are big business, even in New Hampshire. Because STOLIs did not have much prior regulation in the state, statistics were not collected, so the state does not know how many such policies were originated or sold to investors, or who made money during the tangled transaction chain. “However, there are 33 life settlement companies who have been here, and they’ve been here a long time,” said Richardson. “There’s enough money here that people can all take a bite.” – CINDY KIBBE/NEW HAMPSHIRE BUSINESS REVIEW