On May 13, 2009 House Representative Barb Byrum along with several other Representatives proposed HB 4890 and HB 4891 which both deal with prohibiting STOLI (stranger originated life insurance). The basic issue of this legislation is if individuals with life insurance should have the option to sell their policy to a third party so they can access their money that was likely not going to be used for insurance purposes. Such transactions are known as "viatical settlement transactions". "The viatical settlement transaction uses an insurance product to be sold in a secondary market as the financial instrument on which the investment is based." (Office of Financial and Insurance Regulation OFIR) As today's economic times toughen it seems that more and more people are using the viatical settlement market to get cash when their life insurance policy is becoming less useful due to nonpayment of premiums.
The legislation is specifically concerned with whether this STOLI transaction is undermining the purpose and service that life insurance intends to provide its clients. HB 4890 and 4891 prohibits STOLI transactions. It also provides several "consumer protections" such as fingerprinting and background checks for applicants, and "administrative enforcement, preserves private cause of action to viator and provides for civil penalties and restitution." (OFIR)
Arguments in support of legislation:
This legislation adds regulatory framework for viatical settlement transactions and contains consumer protections. Supporters also argue that requiring financing report to the Office of Financial Insurance Regulation provides transparency on these transactions which consequently better serves both the individual client and tax payers alike. It also provides grounds for punishing those who engage in fraudulent conduct.
Arguments against legislation
This legislation is a violation of consumer rights some argue. Since most policies do not result in any claim, the owner of the policy ends up losing the money at their death. However, the policy may have a much greater value in the secondary market. In today's tough economic times, consumers should be able to cash in their policy if they need/want to. In an opposing argument provided by Dough Head, Executive Director of the Life Insurance Settlement Association he takes an analogy using tickets to a sports game. "People sell tickets to big games in the secondary market only when they can't attend or don't care about the game, not when they want to go". Other critiques of the legislation include that the language is too archaic and that instead of preventing STOLI the bill actually just slows the settlement industry.
It seems that both sides of the fence are against STOLI but unsure of how to regulate the secondary market, who the third party is and what rules should be applied to such transactions. This bill has now been referred to the Committee on Economic Development and Regulatory Reform for further discussion.
5/14/09 Doug Head -Life Insurance Settlement Association HB 4890 in Opposition to the bill. This is four pages long and has 16 pages of attachments- a court ruling etc.
The Office of Financial and Insurance Regulation Supports this Legislation Ken Ross and Jenita Moore 5/14/09