On July 28, 2010, I received the following email from Nationwide (text bolded as in original email):
Dear Valued Business Partners,
Due to heightened concerns regarding stranger-owned life insurance (STOLI) and the particular issues it presents for senior citizens, Nationwide® has suspended underwriting cases of our Nationwide YourLife Current Assumption Universal Life Product with face amounts larger than $100,000 for clients over age 65, effective immediately.
This suspension is consistent with Nationwide’s policy against premium financing and STOLI in any form. We feel that protecting against any improper use of this product is in the best interest of our policyholders.
Please contact your Nationwide representative with any questions.
Sincerely,
Peter Golato, Senior Vice President, Nationwide Individual Protection
Jeffrey Stein, Vice President, Nationwide Individual Protection Underwriting and Operations
My first thought was to check the date of the email thinking that maybe this had somehow gotten lost in cyberspace and only showed up now in my mailbox. It is difficult to understand how Nationwide is only now addressing STOLI issues when for the most part STOLI is dead and these issues came to a head years ago.
Nationwide starts out by incorrectly defining STOLI as “stranger-owned life insurance.” In most states, including Nationwide’s home state of Ohio, the term STOLI is defined by statute to be “stranger originated life insurance.” Stranger ORIGINATED life insurance is illegal, but stranger-OWNED life insurance, more commonly known as a life settlement, is perfectly legal. So the first question raised by this email: Is Nationwide going after the illegal conduct or is it trying to prevent consumers from engaging in the legal activity cited in the email?
STOLI (the illegal kind) rose to popularity in the early 2000s, but, in 2005, an opinion by the New York State Insurance Department made it clear that this activity was illegal This was something most of us already knew, but was ignored by unscrupulous producers and promoters and in many cases insurance companies that knowingly or unknowingly sold a lot of insurance this way.
After the NY Opinion, for the most part even insurers who turned a blind eye to these activities realized that new procedures had to be adopted to prevent illegal STOLI. Then in 2008, when the financial markets collapsed and life expectancy companies substantially increased their mortality tables, the investment demand for these products dried up as well. All the while, although already illegal in most states for violating insurable interest laws, states were adopting even stronger anti-STOLI measures.
So now, almost five years after the NY Opinion and two years after the investment tolerance for STOLI dried up, why has Nationwide, out of the blue, become bitten by the STOLI bug? Yes, there are other strains of STOLI popping up like producers actually financing the purchase of policies themselves (POLI, producer originated life insurance). But, why, suddenly today, is this a problem for Nationwide?
Even at its height, STOLI was basically focused on multi-million dollar policies on insureds over age 70. Curiously, Nationwide’s restrictions go well beyond that, suspending the underwriting of policies on insureds as young as 66 and face amounts exceeding only $100,000.
Nationwide’s email also points to premium financing as a problem. In the past, premium financing was used to disguise illegal STOLI schemes, but there are many forms of perfectly legal financing programs that insurance companies have and continue to endorse. Here, however, is where I do agree with them. Premium financing of any kind, whether STOLI or not, does present special compliance and suitability issues.
So what’s really going on over at “the on your side” people? What is it specifically about this policy that makes it so problematic? My speculation would point to some form of mispricing (either priced too cheap, commissions too rich which promotes producer financing, cash values too high, some screw up having to do with term conversions to this product, etc.), but I really don’t know and the email does not tell us. I am sending a copy of this article to Nationwide in the hope of receiving some more enlightening explanation for 1) their action suspending the policy and 2) why they refer to STOLI incorrectly as stranger-owned insurance or was that their intent?
