STOLI changes become law (new law)

A new law prohibits certain contractual arrangements and other activities relating to the purchasing of a life insurance policy that is essentially a wager on someone’s life.

Effective with policies issued beginning May 10, 2009, the law codifies insurable interests and prohibits procurement of a policy on the life of another individual unless the benefits are payable to the insured, representatives of the insured’s estate or a person who had an insurable interest at the time the policy was issued.

“We want to protect life insurance interests, and not turn it into a financial investment,” said Rep. Kate Knuth (DFL-New Brighton), who sponsors the law with Sen. Linda Scheid (DFL-Brooklyn Park).

In a traditional life settlement, a person who owns a life insurance policy but no longer needs it sells the policy for an amount less than the death benefit.

Under stranger-oriented or -initiated life insurance, a third-party investor or hedge fund with no relationship to an individual initiates the policy purchase by paying the premiums and later buying the policies, thereby profiting upon the death of the insured. These are often directed toward senior citizens because the sooner the person dies, the more the speculator profits.

This is in violation of the insurable interest law designed to ensure that a person buying a life insurance policy has an economic interest in the continued life — not death — of the insured.

The law calls for a four-year prohibition on buying STOLI, with the stipulation that an investor could not buy those policies if there were signs of STOLI during that time. It also provides for a four-year rebuttable presumption in civil cases. “That should be enough to stop STOLI,” Scheid said.

A way for a representative of an insured individual’s estate to recovery policy benefits paid resulting from a STOLI agreement is also in the law.

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