Premium Financing, Life Settlements and Insurable Interest Law

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Premium Financing, Life Settlements

and Insurable Interest Law

John P. Gerni

ACLI Regional Vice President

Presentation to the OCI Life Advisory Council

February 5, 2008

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What’s in an acronym?

What

What

s in an acronym?

s in an acronym?

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COLI: Corporate Owned Life Insurance

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BOLI: Bank Owned Life Insurance

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CHOLI: Charity Owned Life Insurance

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LILACS: Life Insurance Life Annuity Contracts

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IOLI: Investor Owned Life Insurance

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SOLI: Stranger Owned Life Insurance

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Insurable Interest: The Heart of Life Insurance

Insurable Interest: The Heart of Life Insurance

Insurable Interest: The Heart of Life Insurance

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Widows and Orphans

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Key Man

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Charities

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Insurable Interest: Sample Statute: Wisconsin

Insurance Law § 631.07

Insurable Interest: Sample Statute: Wisconsin

Insurable Interest: Sample Statute: Wisconsin

Insurance Law

Insurance Law

§

§

631.07

631.07

Insurable interest and consent.

(1) INSURABLE INTEREST. No insurer may knowingly issue a policy to a person 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 disability

insurance policy to a person other than the one whose life or health is at risk unless the latter has given written consent to the issuance of the

policy. Consent may be expressed by knowingly signing the application for the insurance with knowledge of the nature of the document, or in any other reasonable way.

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Insurable Interest: Sample Statute: California

Insurance Code § 10110.1:

Insurable Interest: Sample Statute: California

Insurable Interest: Sample Statute: California

Insurance Code

Insurance Code

§

§

10110.1:

10110.1:

(a) An insurable interest, with reference to life and disability insurance, is an interest based upon a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety of another person and consequent loss by reason of that person’s death or disability or a

substantial interest engendered by love and affection in the case of individuals 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 insurance on his or her own life, health, or bodily safety and have the policy made payable 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 Insurance

The Viatication of Life Insurance

The Viatication of Life Insurance

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The AIDS Epidemics in the 1980s

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The viatical settlement market 1990s

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From Viatical to Life Settlements

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What is STOLI?

What is STOLI?

What is STOLI?

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An individual is assisted in obtaining life insurance on his or

her own life through a non-recourse loan from the third-party

investor to the insured.

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Generally, the investor “loans” the amount of the premiums

for two years to the insured. At the end of two years, the

insured transfers the policy to the investor in exchange of

forgiveness of “loan.” In some cases, the insured receives

cash payment in connection with the transaction.

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Insurable interest?

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Examples of Life Settlements

Examples of Life Settlements

Examples of Life Settlements

EXAMPLES OF LIFE SETTLEMENTS

Face 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

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Life Settlements – A Product Life Cycle

Life Settlements

Life Settlements

A Product Life Cycle

A Product Life Cycle

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Life Settlement Securitization

Life Settlement Securitization

Life Settlement Securitization

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Growth of the Settlement Markets

Growth of the Settlement Markets

Growth of the Settlement Markets

$-$1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0 2001 2002 2003 2004 2005 Size of the Life Settlements Market

$-$20 $40 $60 $80 $100 $120 $140 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 And Some Say It Could Top $125 Billion by 2015

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Settlement Deconstruction of Life Insurance

Settlement Deconstruction of Life Insurance

Settlement Deconstruction of Life Insurance

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From Life Settlements to LILACS

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Arbitrage or Vampirism

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Unlocking Values: Lapse Underwriting

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The Response to STOLI

The Response to STOLI

The Response to STOLI

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Regulatory Guidance

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NAIC Viatical Settlement Model Act Amendments

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NCOIL Life Settlements Model Act

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Regulatory Activity

Regulatory Activity

Regulatory Activity

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Utah Bulletin 2006-3. Premium financing through a non-recourse loan is

not compliant with insurable interest statute.

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Idaho Bulletin 07-03. Arrangements may violate Idaho laws that

requirean insurable interest in the life of an insured and that prohibit rebates or otherinducements to purchase insurance unless the

inducement is set forth in the policy.

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Consumer Alerts issued by Illinois, Ohio, Pennsylvania, North Carolina,

and California and FINRA.

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

New York insurance law.

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NAIC Viatical Settlement Model Act

NAIC

NAIC

Viatical

Viatical

Settlement Model Act

Settlement Model Act

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Deters STOLI by prohibiting settlement of life insurance policies for five

years from policy issuance when the policy is purchased for the purpose of selling into the secondary market

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Exempts legitimate life settlement transactions based on insurable

interest and financing on insurance values

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“Pervasive Fraud” that address settlement broker conflicts of interest and

require settlement broker compensation disclosure.

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Requires disclosures to insured, insurers, and insurance regulator

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Expands regulatory discretion beyond settlements involving terminally or

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NCOIL Life Settlements Model Act

NCOIL Life Settlements Model Act

NCOIL Life Settlements Model Act

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Does NOT have 5 year prohibition language.

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Definition of “life settlement contract” also captures trust

arrangements where STOLI has been masked.

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Definition of “Stranger Originated Life Insurance”

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Violation of STOLI is a fraudulent settlement act.

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Federal Excise Tax Elements

Federal Excise Tax Elements

Federal Excise Tax Elements

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Applies to “specified acquisition of a life insurance contract”

within 5 years of issue

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Tax = 100% of consideration paid to acquire or continue

interest in a policy

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Ten categories of exclusions based on state insurable

interest law

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Disqualified Persons

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Legislative & Regulatory Outlook

Legislative & Regulatory Outlook

Legislative & Regulatory Outlook

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Federal Legislative Outlook

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State Legislative Outlook

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Figure

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References

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