HB404, STOLI, and "Viatical"

The above sounds like a recipe for a hot night on a college campus, but isn't. What exactly it is ain't exactly clear either...

This article written by Michael J. Mauerer for ThisWeek is both a blessing and a curse. We get just enough information to be informed as to what the issue is, but have no idea at all whether or not State Rep. Jay Hottinger -- who is chairing the hearings -- is for it, against it, or just banging the gavel.

What am I talking about? Well, here is the gist of the story:

"Viatical" sounds like something Bob Dole would peddle on TV, but it refers to an insurance-industry practice that state Rep. Jay Hottinger (R-Newark) believes ought to be changed.

Hottinger is the sponsor of H.B. 404, introduced after Thanksgiving, which would change the way Ohio governs "stranger" life insurance.

Known in the insurance industry as STOLI policies, for stranger/investor-originated life insurance, the practice refers to one person taking out a life-insurance policy for another person.

The "good"...

Doug Head, director of the Life Insurance Settlement Association, whose members sell viatical products, said the issue was really one of life insurance companies attempting to sell their products for a higher price than if they are forced to compete with viatical settlement companies.

"It is perfectly legitimate for the life insurance industry to involve itself in public policy advocacy to protect both their franchise and their profitability," Head said. "It is not, however, appropriate to do so at the expense of their own customers."

Steve Washington, an Ohio-based viatical settlement provider, said that, without viatical settlements, insured policy holders who decided that their insurance policies were too expensive would have only two options: either let the policy lapse, and lose any cash value it has, or sell it back to the insurance company for the contractual cash value.

Washington said it was common for that cash value to be artificially low, but that consumers could receive a better deal by selling their policy to a viatical settlement company.

"Industry figures are in the range of three to four times the cash amount that (consumers) would receive from their carriers," Washington said. "(Our) experience is considerably higher."

Among reasons people want to sell their life insurance policies are the availability of better policies at lower prices, changed life circumstances, such as divorce or long-term health care needs, and changes in tax and estate plans.

The "bad":

Mary Jo Hudson, director of the Ohio Department of Insurance, said such practices could lend themselves to fraud, because they are marketed to people between the ages of 65 and 85 - people whose deaths are more readily actuarially predicted for purposes of determining the likelihood of insurance payouts - who may not be as familiar as need be with policy terms.

In a statement released in December, Hudson said consumers need to be fully aware that, unlike a traditional policy where the insured's loved ones are beneficiaries of the death benefits, in a STOLI arrangement, an investor group-strangers-will likely acquire an interest in the life of a participant.

The "ugly": I have no idea what any of this means...

It would help if we knew what the current government regulations were and what Hottinger hopes to change; but we get none of that in the article.