A roll of the dice

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Carl Wolk started a business in Minneapolis 44 years ago, eventually expanding from one store to 16. In 2005, he was approached by other businessmen who offered to buy out a majority of Wolk’s business with the understanding that he would receive a payout over five years.

Two years later, those same businessmen filed for bankruptcy. The deal and the promised payout were gone.

“So everything I had coming, it went down the tubes,” he said. With few options, Wolk sold one of his few remaining assets: his life insurance policy.

Speaking April 1 before the House Commerce and Labor Committee, Wolk said that he was also having problems making payments on the life insurance policy because the premiums had gotten so high. With the sale of his policy, he was able to assure that he and his wife could live comfortably.

According to the Life Insurance Settlement Association, Wolk’s situation is not unusual. A typical scenario could involve someone wanting to sell a life insurance policy valued at approximately $2 million. It they were to surrender their policy to their life insurance provider, they may be able to recover $50,000. But if they were to sell their policy to the “secondary market,” they could possibly receive $200,000.

Yet, with this growing market and the professed good intentions of some of the companies involved, there is a flip side. There are those who see the potential for a financial windfall, and are looking for ways to take advantage.

The stranger among us

The 800-pound gorilla in the room is called STOLI, or stranger-originated life insurance. STOLI is life insurance issued on the life of someone as part of a transaction in which they agree to transfer the policy to a “stranger.” The new owner could be one person, or a group of investors.

Once the policy is transferred, the owner continues to pay the premium until the seller dies. When the insured dies, the investor gets paid. Those often targeted for this arrangement are seniors, ages 65 to 85, encouraged to sign up for new life insurance policies they will then sell for a buyout.

According to the nonpartisan House Research Department, investors are attracted to these arrangements — also known as “death bonds” — because their return on investment is not dependent on the stock market, or the insured’s financial performance.

The goal is to make the investors money, not to provide financial security for the insured.

Taking action

In California, two men were indicted in 2006 for conning dozens of members of a church to take out life insurance policies with promises of quick money for the church. The policies were sold to investors with the understanding that the return on the investment would be high because the church members “were predominantly African Americans and had a higher mortality rate than the average population,” according to the indictment.

At least 20 states are considering legislation dealing with the life settlement industry and STOLI. This session, two bills have been introduced in Minnesota.

HF3534, sponsored by Rep. Kate Knuth (DFL-New Brighton), calls for a five-year period between the time a life insurance policy is issued and the time any type of life settlement agreement could be reached. The bill is based on the Viatical Settlements Model Act of the National Association of Insurance Commissioners. It awaits action by the House Commerce and Labor Committee.

“A life insurance policy that is just made for someone else dying as an investment is bad,” Knuth said. “The people who need a life insurance policy, and those who buy and sell them, no one wants it to get out of hand. The question is: How do we decide to regulate?”

A companion bill, SF3063, sponsored by Sen. Linda Scheid (DFL-Brooklyn Park), awaits action by the the Senate Commerce and Consumer Protection Committee.

Another bill takes a slightly different tact. HF3878, sponsored by Rep. Leon Lillie (DFL-North St. Paul), also focuses on restrictions to STOLI practices, but does not have the five-year waiting period. The bill adopts language supported by the National Conference of Insurance Legislators. It, too, awaits action by the House Commerce and Labor Committee.

“It’s hard to think of life insurance like a house, or as a product or property that someone might own, but it is.” And with the bill that he has introduced, “you would be able to cash out if you want to.”

Though he is still learning about many of the issues involved, Lillie agrees that the STOLI problems need to be addressed, even though the consumer issue is just as important. “If you own something, you should be able to sell it.”

A companion bill, SF3495, sponsored by Sen. Dan Sparks (DFL-Austin), awaits action by the the Senate Commerce and Consumer Protection Committee.

For and against

Representing the National Association of Insurance and Financial Advisors, Dominic Sposeto spoke in favor of any legislation that would help to guard against STOLI, saying that this practice was simply easy money for the secondary life insurance market.

Sposeto said STOLI is an attempt to get around the doctrine of life insurance, and it creates problems for the industry, agents and policyholders. If this trend continues, he said insurance companies will be reluctant to write policies for seniors, and that will lead to increased costs for seniors who want insurance.

At the same time, Sposeto said, if there are legitimate businesses helping policyholders to sell their policies, they should have the right to do so. “We want to maintain true life settlements, but somewhere we have to draw the line.”

John Sabes, CEO of GWG Life Settlements in Minneapolis, said that life settlements offer tremendous opportunities for seniors to sell their policies, and cautioned the committee about restrictive legislation that would hinder the practice. Sabes also said that it was his company that bought Wolk’s policy, and had there been the five-year ban in place Wolk would not have been able to sell his policy.

Rep. Joe Atkins (DFL-Inver Grove Heights), chair of the House Commerce and Labor Committee, acknowledged that the issues are complicated and it will take time to resolve them all. But there is a desire for those parties involved to come to some type of compromise, he said.

“There is general agreement that something should happen,” Knuth said. “There’s not general agreement on exactly what.”

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