Life Settlement - Premium Finance pdf

8/7/2019 Life Settlement - Premium Finance pdf

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Copyright American Council of Life Insurers 2006

Premium Financing, Life Settlementsand Insurable Interest Law

John P. GerniACLI Regional Vice PresidentPresentation to the OCI Life Advisory CouncilFebruary 5, 2008


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Whats in an acronym?WhatWhats in an acronym?s in an acronym?

COLI: Corporate Owned Life Insurance

BOLI: Bank Owned Life Insurance

CHOLI: Charity Owned Life Insurance

LILACS: Life Insurance Life Annuity Contracts

IOLI: Investor Owned Life Insurance

SOLI: Stranger Owned Life Insurance

STOLI: Stranger Originated Life Insurance

SILI: Stranger Initiated Life Insurance

IILI: Investor Initiated Life Insurance


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Insurable Interest: The Heart of Life InsuranceInsurable Interest: The Heart of Life InsuranceInsurable Interest: The Heart of Life Insurance

Widows and Orphans

Key Man

Charities Trusts


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Insurable Interest: Sample Statute: WisconsinInsurance Law 631.07Insurable Interest: Sample Statute: WisconsinInsurable Interest: Sample Statute: WisconsinInsurance LawInsurance Law631.07631.07

Insurable interest and consent.

(1) INSURABLE INTEREST. No insurer may knowingly issue a policy to aperson 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 disabilityinsurance policy to a person other than the one whose life or health is atrisk unless the latter has given written consent to the issuance of thepolicy. Consent may be expressed by knowingly signing the applicationfor the insurance with knowledge of the nature of the document, or in

any other reasonable way.


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Insurable Interest: Sample Statute: CaliforniaInsurance Code 10110.1:Insurable Interest: Sample Statute: CaliforniaInsurable Interest: Sample Statute: CaliforniaInsurance CodeInsurance Code10110.1:10110.1:

(a) An insurable interest, with reference to life and disability insurance, is

an interest based upon a reasonable expectation of pecuniary advantagethrough the continued life, health, or bodily safety of another person andconsequent loss by reason of that persons death or disability or asubstantial interest engendered by love and affection in the case ofindividuals 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 insuranceon his or her own life, health, or bodily safety and have the policy madepayable 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.


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The Viatication of Life InsuranceThe Viatication of Life InsuranceThe Viatication of Life Insurance

The AIDS Epidemics in the 1980s

The viatical settlement market 1990s

From Viatical to Life SettlementsSTOLI and Premium Financing


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What is STOLI?What is STOLI?What is STOLI?

An individual is assisted in obtaining life insurance on his or

her own life through a non-recourse loan from the third-partyinvestor to the insured.

Generally, the investor loans the amount of the premiums

for two years to the insured. At the end of two years, theinsured transfers the policy to the investor in exchange offorgiveness of loan. In some cases, the insured receivescash payment in connection with the transaction.

Insurable interest?

Implications with public policy


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Examples of Life SettlementsExamples of Life SettlementsExamples of Life Settlements

EXAMPLES OF LIFE SETTLEMENTSFace 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


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Life Settlements A Product Life CycleLife SettlementsLife SettlementsA Product Life CycleA Product Life Cycle

Source: National Underwriter


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Life Settlement SecuritizationLife Settlement SecuritizationLife Settlement Securitization

Source: A.M. Best


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Growth of the Settlement MarketsGrowth of the Settlement MarketsGrowth of the Settlement Markets

$-

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$10.0

200 1 2002 2003 2004 2005

Size of the Life Settlements Market

$-

$20

$40

$60

$80

$100

$120

$140

2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 01 5

And Some Say It Could Top $125 Billion by 2015

Source: Life Settlement Institute, Lehman Brothers Estimates


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Settlement Deconstruction of Life InsuranceSettlement Deconstruction of Life InsuranceSettlement Deconstruction of Life Insurance

From Life Settlements to LILACS

Arbitrage or Vampirism

Unlocking Values: Lapse Underwriting

Investment versus Insurance Values


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The Response to STOLIThe Response to STOLIThe Response to STOLI

Regulatory Guidance

NAIC Viatical Settlement Model Act Amendments

NCOIL Life Settlements Model Act

Federal Excise Tax


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Regulatory ActivityRegulatory ActivityRegulatory Activity

Utah Bulletin 2006-3. Premium financing through a non-recourse loan isnot compliant with insurable interest statute.

Idaho Bulletin 07-03. Arrangements may violate Idaho laws thatrequirean insurable interest in the life of an insured and that prohibitrebates or otherinducements to purchase insurance unless the

inducement is set forth in the policy. Consumer Alerts issued by Illinois, Ohio, Pennsylvania, North Carolina,

and California and FINRA.

New York Opinions: A valid insurable interest does not exist under the

New York insurance law. Zero-Premium Financing Investigations: Vermont, Georgia, and

Alabama

U.S. Treasury response to U.S. Congress on potential tax consequences


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NAIC Viatical Settlement Model ActNAICNAICViaticalViaticalSettlement Model ActSettlement Model Act

Deters STOLI by prohibiting settlement of life insurance policies for fiveyears from policy issuance when the policy is purchased for the purposeof selling into the secondary market

Exempts legitimate life settlement transactions based on insurable

interest and financing on insurance values

Pervasive Fraud that address settlement broker conflicts of interest andrequire settlement broker compensation disclosure.

Requires disclosures to insured, insurers, and insurance regulator

Expands regulatory discretion beyond settlements involving terminally orchronically ill individuals to invalidate transactions


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NCOIL Life Settlements Model ActNCOIL Life Settlements Model ActNCOIL Life Settlements Model Act

Does NOT have 5 year prohibition language.

Definition of life settlement contract also captures trustarrangements where STOLI has been masked.

Definition of Stranger Originated Life Insurance

Violation of STOLI is a fraudulent settlement act.

Disclosures to consumer, insurer, and insurance regulator


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Federal Excise Tax ElementsFederal Excise Tax ElementsFederal Excise Tax Elements

Applies to specified acquisition of a life insurance contract

within 5 years of issue

Tax = 100% of consideration paid to acquire or continueinterest in a policy

Ten categories of exclusions based on state insurableinterest law

Disqualified Persons

Foreign Trusts


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Legislative & Regulatory OutlookLegislative & Regulatory OutlookLegislative & Regulatory Outlook

Federal Legislative Outlook

State Legislative Outlook

State Regulatory Outlook


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Life Settlement - Premium Finance pdf

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