The main aim of buying a life insurance policy is to protect one's family or business in the event of death. Therefore, it makes sense that the beneficiaries have a stake in the life of the insured - they are dependent on the insured for financial or business stability, etc. This is called insurable interest, and is the main premise on which life insurance policies are issued.

Over recent years, the life settlement industry has become somewhat inextricably linked to what is known as STOLI (Stranger Originated Life Insurance). By definition, a life settlement is the legitimate liquidation of a life insurance policy by an owner who has outlived the insurable interest upon which the policy was originally purchased. On the other hand, STOLI is an arrangement in which a life insurance policy is taken out with resources provided or guaranteed by those who have no insurable interest to the insured and who expect to control the beneficial ownership of the policy in the future.

The right of a policy owner to engage in a life settlement was guaranteed by U.S. Supreme Court Justice Oliver Wendell Holmes in 1911. In this landmark case, he ruled that life insurance is personal property and the owner is protected by all the same inalienable rights that any owner of real estate, stocks or any other assets enjoy. In this final ruling, he drew a very clear distinction between insurance transactions based on insurable interest and those where none exists. (U.S. Supreme Court GRIGSBY v. RUSSELL, 222 U.S. 149 (1911) 222 U.S. 149)

Legislative activity in the states has picked up over the last year as bills designed to stop STOLI transactions have been introduced and passed. At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a life settlement and STOLI, "When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company -- that is a legitimate transaction." Wenger emphasized, "STOLIs are different.

For the benefit of consumers, the life insurance and life settlement industries must agree to work together in good faith. If so, then together they will be able to very quickly make STOLI transactions almost impossible, while allowing the life settlement industry to continue to help those who would be best served by a vibrant secondary market.

I would be happy to answer any questions you may have about this or any other life settlement topic. I can be reached at 888-849-0887 or llagrotte@lsa-llc.com. 

100 Years of Life Settlements

California Broker Magazine, December 12, 2011

On December 4, 1911, the United States Supreme Court decided the case of Grigsby vs. Russell, which is considered to be the legal basis for the life settlement industry today. The decision, written by the legendary Justice Oliver Wendell Holmes, Jr., ruled that the sale of a life insurance policy, which was validly obtained by someone with insurable interest, could be legally sold to a third party without insurable interest. Read more...

GAO Study Finds that Life Settlements Deliver Almost 8 Times Surrender Value to Seniors

The U.S. Government Accountability Office recently issued a long anticipated report on the state of the emerging Life Settlement market. One of the key findings, based on analysis of over 1,000 life settlement transactions, was that seniors selling their policies in a life settlement transaction received almost 8 times as much money as they would have had they surrendered the policy to the insurance company. "This confirms what we have been saying all along, life settlements are good for consumers and result in maximizing policy value for seniors who no longer want or need their life insurance policy," said Brian Smith, President of the Life Settlement Institute. For example, proceeds of a life settlement may help a senior pay for long term care.

Using just the 1020 policies relied upon in the study means that life settlements delivered $232 million more value to seniors than they would have received from the issuing insurance company. The study shows that seniors would have received $37.4 million if they surrendered their policy but instead received over $269 million from the life settlement transactions.

The study also found that although the vast majority of states have adopted pervasive regulation of the life settlement market, some have yet to do so and differences among state laws can be significant. Smith added: "This finding also comes as no surprise to us. We have been working with state legislators and state insurance regulators to adopt consistent model legislation across the country and eliminate such discrepancies. Last year we helped get legislation enacted in several states including New York and California. However, there are 50 states and it takes time to get these initiatives passed. The National Conference of Insurance Legislators (NCOIL) Model Life Settlement Act is a very good bill and we will continue to support its adoption around the country.