Life Settlements   Opinion
Let’s Work Together to Protect the Integrity of Our Industry
by Bruce Ferguson

All life insurance professionals with a long-term commitment to this in-dustry and its customers should carefully read Doug Head’s article in the August issue of California Broker titled “Is a Stranger-Owned Life Insurance a Red Herring?” Read it and then reject it. The path Mr. Head outlines would produce a potential nightmare for our industry, threatening the viability of vital markets that brokers and companies worked together to maintain in the face of often unfair attacks.

Mr. Head claims he is just trying to protect legitimate life settlements for the benefit of consumers. In fact, unless Mr. Head’s efforts are countered, there may be irreparable damage not only to the market for legitimate life settlements, but also to the very life-blood of our industry.

The focus of Mr. Head’s article is the carefully crafted effort by the National Association of Insurance Commissioners (NAIC) to prevent abusive STOLI transactions. In June 2007, NAIC approved amendments to the Viatical Settlements Model Act designed to deter STOLI while protecting legitimate life settlements. The amendments contain a strictly limited -- let me repeat that -- a strictly limited five-year moratorium on suspect transactions. The moratorium applies only to transactions that have the indicia of STOLI. It does not apply if the policy owner needs to settle the policy due to illness, unemployment, death of the beneficiary, or other legitimate reasons. The fact that Mr. Head fails to mention these crucial limitations raises serious questions about the credibility of his entire article.

Moreover, Mr. Head unfairly challenges the American Council of Life Insurers’ (ACLI) position on life settlements. ­ACLI’s longstanding position was made quite clear by president Frank Keating in May 3, 2006 in testimony before the NAIC’s Life Insurance and Annuities (A) Committee. He noted that ACLI has no quarrel with legitimate viatical or life settlements, “We understand that policyholders who face extraordinary medical expenses or whose financial protection needs have changed may, after considering the ramifications, decide to sell their policies in the secondary market. Nor do we believe that legitimate premium financing arrangements, which permit consumers to afford or maintain important life insurance coverage that would otherwise be beyond their reach, are inherently bad. Rather, our strong objection is with those schemes initiated by some investor groups that are designed to generate life insurance policies for sale in the secondary market.” There is no ambiguity in ACLI’s position. The revised NAIC Model Act, which ACLI supports, protects legitimate life settlements and stops abusive transactions before they happen.

Strike three is Mr. Head’s utterly specious comparison of STOLI with corporate-owned life insurance. As every professional broker knows, COLI is a long-standing tool utilized by employers as a means to fund employee benefits and enable them to attract and retain the highest quality workforce. Under the COLI Best Practices Act, employers must receive the informed consent of the employee before including that employee in a COLI policy. The employee must be advised that the policy will remain intact and the employer will remain the beneficiary even after the employee leaves the company.

The key point is that a legitimate and long-recognized insurable interest exists at the outset. This is wholly different from STOLI, where the real beneficiaries of the policy have no insurable interest at any point in the transaction.
We have a golden opportunity right now to stop abusive transactions before they happen by working to enact the NAIC model. The NAIC model will protect the market for legitimate life settlements by removing the economic incentives for the fly-by-nighters who only want to make a quick buck from STOLI. These operators are not in the insurance market for the long term. They will simply walk away when the abuses come to light while the industry professionals will have to clean up the mess they create.

And, in this regard, ask yourself the troubling question of whose interest Mr. Head really represents. How is it in the interest of professional brokers and their clients for Mr. Head to dredge up the whole COLI issue–an issue that we worked so hard to resolve?

How is it in the interest of professional brokers and their clients for Mr. Head to continually raise the issue of the tax treatment of life insurance? Are these the actions of someone concerned about the long-term health and viability of our industry and in the principled uses of life insurance to protect the nation’s families and businesses? Mr. Head’s willingness to trash the life-blood of this industry suggests that his interest is solely for the short-term.

The NAIC model is the best way to preserve the long-term viability of the market for legitimate life settlements. As we did with COLI, let’s work together to protect this market from the abusers who care nothing about our industry.
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Bruce Ferguson is senior vice president, State Relations for ACLI.
For more information, call 202-624-2385, fax 202-572-4755, or e-mail bruceferguson@acli.com.