Insurance agents still don't understand the difference between life settlements and STOLI, Pt. 1Blog added by Erez Rotem on August 5, 2014
Erez Rotem - Goldenbridge

Erez Rotem

Summit, NJ

Joined: November 19, 2012

I recently shared an article on a social media site, titled, "What every advisor needs to know about life settlements," by Darwin Bayston, CEO of Life Insurance Settlement Association (LISA). The article was well-written and made some very clear and valid points about the lack of awareness of life settlements.

One of the responses I got from the post included these words: "I am not saying that life settlements are bad, but there are better things to do in most cases. Besides, most life applications ask the questions nowadays to prevent these stranger-owned life insurance policies and in most cases, would not pay the claim. But good luck." Clearly, the financial community has not educated themselves on the facts about life settlements.

According to Darwin, "49 percent of financial advisors lack knowledge about life settlements." Again, if you have read my previous blogs), I blame the life settlement industry, including myself, for not doing a good enough job of getting the truth out.

The first thing that amazed me about this statement was that life insurance agents clearly still don't understand the difference between life settlements and stranger-originated life insurance (STOLI). According to Wikipedia, stranger-originated life insurance generally means any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a life insurance policy for the intended benefit of a person who, at the time of policy origination, does not have an insurable interest in the life of the insured under the laws of the applicable state.

While a life settlement is defined as the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit, this quote from Chris Orestis sums it up best: "A life settlement is the legitimate liquidation of a life insurance policy by an owner who has outlived the insurable interest upon which the policy was originally purchased. On the other hand, a STOLI transaction is initiated by a third party who offers monetary inducements to entice someone to purchase a life insurance policy with no legitimate insurable interest. The intended recipient of the policy's value is the third party actually paying the premiums."

Clearly the life insurance carriers who seem not to like life settlements have done a good job confusing agents by grouping life settlements with STOLI. Unfortunately, they haven't made the effort to clear the matter up for their agents. Stay tuned for part two of this blog.

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