Everybody seems to agree that life settlements themselves have a valid function. After all, if you've got a sizeable policy but no longer need the death benefit, and the policy's cash value won't cover your current needs, is there really a problem with finding someone willing to pay your premiums in order to have your death benefit assigned to them, in exchange for a hefty sum now?
Probably not. But when securitization enters the picture–insurance policies purchased and bundled together, then sold as an investment–that changes everything. Or does it?
The insurance industry has issues with the underlying principle and its potential for abuse, as well as long-term concerns for pricing and profitability. Jack Dolan at the American Council of Life Insurers says, "We don't get into the pros and cons of securitization. But we do make clear that STOLI [stranger-owned life insurance] is taking place and that if any investment package contains these fraudulent arrangements, there is a potential for real problems with that investment."
The STOLI he's talking about is, of course, the arrangement between total strangers for one to purchase life insurance, often on borrowed money, expressly for the purpose of turning that policy over to the other, and for the other to lend that money and then take over premiums on the policy after the contestable period is over, then to benefit when the insured dies. Forty-five states currently have guidelines regarding viatical or life settlements, according to Susan Voss, VP of the National Association of Insurance Commissioners and insurance commissioner of Iowa.
