Life insurance, STOLI, and Secondary Markets, a basic explanation.

Greetings Viners:

It seems that the topic of Life Insurance has become a hot issue on the news feed radar. I have noticed while reading these articles, and the subsequent comments to the articles, that a general misconception exist regarding Life Insurance, STOLI, and secondary life insurance markets.

I have decided to take on the task of providing viners a basic understanding, a layman's understanding of the general context of these discussions.

Life Insurance, and general explanation.

Insurance as a market concept has actually been around since Roman times, however, life insurance itself is relatively new concept, a little over 100 years, in relation to the insurance market in general.
The legitimacy of life insurance is typically credited to Oliver Wendell Holmes' opinion in a Supreme Court decision. In the matter of Grigsby vs. Russell (1911), when Holmes wrote that, "Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving."
Additionally, this opinion defined life insurance as property a person can own, much like a stock or bond ownership in a company. As a rule however, the beneficiary of the life insurance policy must meet a standard. The general standards are a relationship by blood or law, or have a vested interest in a person's life.

The revaluation of life insurance is the basic idea that would allow anyone, especially people who are living in the most merger circumstances, could effectively leave a tangible estate to their heirs. And this of course, is the cornerstone of life insurance market.

"STOLI" a general explanation.

As I stated above, the general standard for qualifying as a beneficiary is that the beneficiary(s) must have some type of relationship to the insured's life. The reason for this relationship is to provide a protection of the insured against fraud and conspiracy in the un-natural death of the insured. Blood relationships are easily understood in most cases as children, parents, siblings and their children, or just about anyone who possess a blood family relationship with the insured. Law relationships are also easily understood as a spouse, in-laws, adopted children, or any person the court has found to be in reasonable close dependency of the insured (i.e. non-blood related children who the insured was providing for). The third option of a beneficiary is a bit more ambiguous, being a "vested interest" in the insured.

This requirement reasonably explained on its face and general meaning to society, is someone that a partner with the insured in a business venture, a person who lends the insured money or other capitalization assets, or possess a tangible interest in the insured's future performance (i.e. think of a movie star or artist and the studio) or any person who employs another person and the continued success of that person in dependent on the employee. Like I said, vested interest can be interpreted many ways.

What is generally not allowed, is a beneficiary that does not possess a reasonable stake in the insured's life, in other words, these people are "strangers."

"STOLI" is an acronym that means: "Stanger originated Life Insurance." A similar concept, "SOLI" or "Stranger owned Life Insurance," or "SCoLI" which is" Stanger conceived Life Insurance." All three concepts are basically NOT considered legitimate practices in the life insurance market. More so, such arrangements can be considered fraud, with civil and criminal implications.

The Secondary Life Insurance Market Place.

The secondary life insurance market essentially sprouted out of a dilemma of the AIDS/HIV epidemic. Simply explained, well meaning and concerned co-workers, business partners, family members among others, who were essentially compelled to help those inflicted with AIDS/HIV and were suffering both physically and financial from the disease, were providing money and other tangible assets to the inflicted in an effort to comfort them in the last days of their lives. Additionally, in the cases were the inflicted was homosexual and was insured, usually by an employer, the dilemma was further confounded by a situation where the insured did not have any legitimate heirs to the estate and the life insurance policy as an asset, would essential die with the insured. As an equitable last gesture of gratitude of the inflicted, it was common to bequeath the estate, including the life insurance policy to those who assisted the insured. However, as discussed above, it is very questionable in these cases that these beneficiaries meet the "vested interest" standard.

The reason this is difficult is obvious because in most cases, the beneficiary enjoined themselves in the relationship most likely after it was determined the insured was terminally ill and dying. However, it is relevant to the situation in these cases that the beneficiary had nothing to do with the "origination" or "ownership" or the "purchase" of the life insurance policy in the first place. From this dilemma, the Viatical Settlement Market was born.

Viatical Settlement explained.

The viatical settlement laws in many state set a standard for testing a beneficiaries' interest in the insured. Essential, if the beneficiary did not influence or instigate in anyway, the person who is terminally ill, in obtaining the life insurance policy, and is in fact offering a cash settlement greater than the "surrender value" of the policy, then it is fair and equitable for the insured to direct the proceeds of the policy to this beneficiary. This market is at least 20 years old now, and in most state, heavily regulated by the commissioner of insurance or similar agency.

Life or Senior Settlements, a simple explanation.

A similar, however, not exactly the same, is a new market known as "Life or Senior" settlements. It is the same in the since, that the test from vested interest in similar to that of a viatical settlement. The difference is a life or senior settlement means the insured does not meet the standard of "terminally ill." In other words, the insured is healthy and is most likely not going to die anytime in the perceivable future. Additionally, the insured may in fact have relatives either by blood or law, who are legitimate heirs to the estate.

The special circumstance of these people are rather unique in the since of preparing for the distribution of their estate once they do pass away. Generally speaking, the insured obtained the life insurance policy in the beginning of their career, maintaining it for the protection of their family, business, or venture partners, and now have reached a point in their life, it is no longer financial viable for them to maintain the policy. Typically speaking, the motivation for this class of insured to either "surrender" or "sell" the policy is usually on the advice an estate attorney, or financial advisor, or tax attorney as part of a disposal or distribution plan of the insured's estate. However, it also may be a motivation for an insured senior citizen to sell their life insurance policy for the purposes of maintaining other assets in the estate (i.e. house poor) due to inflation or reduced cash flow, or unanticipated expenses.

Generally speaking, the Life Settlement market limits itself to life insurance policies that have a rather higher than normal face value (half million plus) and the insured is most likely not being survived by any immediate dependants. (i.e. Spouse has passed away, and all the children are grown up, living on their own). The higher face value of the policy is for the obvious reasons of making it a viable investment in the market place. Other unique circumstances of this investment compared to a viatical settlement, is the investors cannot know the identity of the insured or have any type of relationship with the insured. Additionally, these policies are generally bundled into a portfolio of several policies and the investor essentially buys a share of the portfolio (like a stock or bond) as opposed to being the sole beneficiary of the policy. Ironically, it is basically using the STOLI concept to protect the insured from hazards of STOLI principles.

Now that I have attempted to explain this, please feel free to share your comments, concerns or point out anything that I may have missed.

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