Bill > S487

Introduced Session

This bill amends and supplements the "Viatical Settlements Act," P.L.2005, c.229 (C.17B:30B-1 et seq.), to address concerns regarding stranger-originated life insurance, or "STOLI," as it is sometimes called. STOLI is a practice in which a life insurance policy is purchased for the benefit of a third party who, at the time of policy issuance, has no insurable interest in the life of the insured. Insurable interest, under long standing law, generally requires that a person applying for a life insurance policy have an interest in the continued life of the insured. This is most often because the insured is a blood relative or because an economic relationship exists between the parties. Since it has long been illegal and void as a wager on human life to seek to obtain insurance on a stranger, modern STOLI schemes have endeavored to hide the offensive ownership of the policy from insurers at inception and from viatical settlement companies when the policy is sought to be sold. STOLI transactions also often include acts of fraud in the application for new insurance, such as the applicant misrepresenting their net worth or the amount of in-force insurance they have. STOLI practices include, but are not limited to, cases in which life insurance is purchased with resources or guarantees from or through a person or entity who, at the time of policy inception, could not lawfully initiate the policy themselves and where, at the time of inception, there is an arrangement, verbal or written, to directly or indirectly transfer the ownership of the policy or policy benefits to a third party. Not only are STOLI schemes harmful because they circumvent insurable interest laws, they can also limit an insureds ability to purchase life insurance later if he has used up his capacity for insurance on the STOLI arrangement. This bill defines STOLI and classifies it as a fraudulent act within the context of the "Viatical Settlements Act," which regulates viatical settlement arrangements and practices in New Jersey. A viatical settlement is the sale or transfer of an existing life insurance policy while the owner or insured is still alive, for a value less than the expected death benefit. A viatical settlement contract may include a contract for a loan or other financing transaction. Viatical settlement contracts, while involving the sale of a policy to a third party that lacks insurable interest, are not STOLI because, by law, the insurable interest requirement is only applicable at the time of policy issuance and cannot be applied to the later assignment of a policy to a third party. Specifically, the bill provides a definition of stranger-originated life insurance and explicitly states that stranger-originated life insurance is not a viatical settlement contract. The bill prohibits trust-initiated STOLI by prohibiting the assignment of the ownership or beneficiary interest in a trust or other entity that owns such a policy prior to, or for two years after, the issuance of a policy, if the trust or other entity was formed or availed of for the principal purpose of acquiring one or more life insurance policies. It also prohibits establishing trusts created to give the appearance of insurable interest and that are used to initiate policies for investors. The bill also prohibits premium finance loans prior to or for two years after the issuance of a policy where certain terms of the loan are indicative that the loan is being used to manufacture a STOLI policy, including the pre-arranged sale of the policy through the loan, a guarantee of the viatical value of the policy or a loan which grossly exceeds the premiums and other costs of the policy. The bill prohibits pre-arranged sales of new life insurance by prohibiting any agreement to sell a policy at any time prior to, or within two years after issuance of a new policy, regardless of when the policy is to be transferred, and ensures that lenders of premium finance loans do not take ownership of the policy through the loan terms. The bill also prohibits licensees from soliciting or marketing new life insurance for the sole purpose of settling the policy. Finally, the bill provides new measures to detect STOLI and prevent STOLI, and provides new consumer protections against STOLI. It authorizes life insurers to ask certain questions in applications for new life insurance policies which will evoke responses evidencing attempts at accomplishing stranger-originated life insurance and also allows insurers to advise applicants who are seeking premium financing of certain risks associated with premium financing to help protect against STOLI.

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Raymond Lesniak (D)*, 

Introduced in the Senate, Referred to Senate Commerce Committee (on 01/12/2010)