Proposed legislation could be harmful to life insurance issuers

A piece of proposed legislation could have a major impact on the ways in which hedge funds are allowed to purchase and resell life insurance policies.

Lawmakers in at least five states across the country are now considering putting restrictions on the ways in which hedge funds can purchase and then resell life insurance policies known as “stranger-originated life insurance” or STOLI, according to a report from Life Health Pro. These policies could be purchased and then resold to someone who has little to no insurable interest in the life of the person originally insured. Current laws allow the premiums for policies which are found to have been obtained fraudulently to be kept by the insurer, but these states want to change those statutes so that premiums are returned to the hedge fund instead.

The states that are currently or have recently considered such legislation are Connecticut, Delaware, Florida, Minnesota and South Dakota, the report said. However, as a result of heavy lobbying from the life insurance industry as a whole, such a bill seems to have already been turned back in South Dakota, where SB 134 was tabled earlier in February. Currently, the state has no STOLI laws, so the issue will likely crop up again at some point in the future.

Further, Paul Brawner, a life insurance agent who also serves as chief executive for the National Association of Insurance and Financial Advisors in Florida, says that the issue isn't likely to go away.

“We anticipate that some speculators will once again try to push for legislative changes this year that will incent investors to participate in these STOLI arrangements,” Brawner told the site. “We urge lawmakers to be aware of any attempt that would preserve value in policies that have been obtained fraudulently or reduce the ability of life insurers to detect fraud.”

Life insurance companies should try to be aware of all the legislative changes going on nationwide that might affect their businesses, consider how each will impact them specifically, then formulate plans that will help them to deal with potential changes.