Ameritas lawsuit claims life policy conversion strays too close to STOLI

The defendant in a California lawsuit that challenges the line between life settlement and stranger-originated life insurance is asking the court to dismiss the Ameritas complaint.

Ameritas Life Insurance Co. filed the lawsuit in March, claiming that a request to convert a term policy into permanent life insurance strayed too close to STOLI territory. Stranger-originated life insurance is a policy someone, usually an investor, buys on another person with whom they don't have an existing relationship.

Several states, including California, have laws banning the practice. If Ameritas is successful with its legal challenge, the precedent will have a substantial impact on the life settlement industry.

Defendant Wilmington Trust claimed that the insurer has no case. Wilmington describes itself as a “securities intermediary,” meaning it is potentially managing the policy for an unnamed investor.

“Notably, Ameritas does not allege it was illegal for it to process Defendant’s conversion application or that the Policy is void,” the Wilmington motion to dismiss reads. “It seeks ‘guidance’ from the Court."

Term policy bought

Amir Moghadam bought the term policy 20 years ago from The Union Central Life Insurance Co., a predecessor to Ameritas, with a face amount of $3.7 million. Forty seven years old at the time, Moghadam named his wife as the beneficiary.

Moghadam’s policy provides a conversion privilege, which allows the owner to convert the policy to “any permanent plan of insurance made available by the company for such purpose at the time of conversion.”

About five months ago, Ameritas informed Moghadam that his premiums would increase from about $7,000 annually to over $73,000, court documents say. Those premiums would have increased every year and exceeded $300,000 when Moghadam reached 80 years old.

“Moghadam … had no desire to pay more than ten times the premiums he was paying, so he sold his policy,” the Wilmington motion reads. “The policy would have been worth a fraction of what he sold it for but for the fact it permitted the owner to convert it from a term policy to a permanent policy.”

In February, Moghadam and Wilmington Trust submitted change of ownership forms to Ameritas, requesting that it change the policy’s owner to the defendant. The insurer quickly approved the request, but then filed its lawsuit a few weeks later.

Life settlement market thrives

Life settlements evolved as an alternate route to lapsing a policy for nothing, or surrendering the policy for a nominal cash value. The first attempt to transfer ownership of a life insurance policy took place in 1911 and the resulting legal battle went all the way to the Supreme Court. Life insurance is private property and can be legally assigned by its owner, the SCOTUS ruled.

“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property,” Supreme Court Justice Oliver Wendell Holmes, Jr., said. “To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

The life settlement market is now a $4 billion-a-year industry and one that should see “steady growth” in the coming years, Conning has said.

Life settlements are generally distinguished from STOLI policies at the time of purchase.

For example, under California law, any party purchasing life insurance must have an "insurable interest" in the person being insured. If there is no insurable interest, the insurer has a basis for declaring the policy void.

Ameritas settled a STOLI lawsuit against Wells Fargo earlier this year.

‘Less favorable to Ameritas’

Ameritas bases its lawsuit on the conversion meeting the definition of a new policy, with neither Wilmington Trust nor the unknown investor having any “insurable interest” in Moghadam. The new policy has “substantial differences” from the original policy, Ameritas noted. It is a "flexible premium adjustable universal life" policy and can have an account value enabling loans against the policy.

The policyowner may change the amount and frequency of premiums as desired, the insurer said. Premiums need only be enough to maintain a cash surrender value that can cover the monthly deductions for the policy.

“The terms of the New Policy that Wilmington Trust and the unknown investor seek to enjoy are less favorable to Ameritas than the terms of the Old Policy, and Ameritas would not have issued the New Policy to Wilmington Trust but for the existence of the Old Policy and the ‘conversion privilege’ language,” the Ameritas complaint says.

In its motion to dismiss, Wilmington Trust claimed that the insurer’s argument disregards the entire life settlement concept.

“By suggesting Defendant must have an insurable interest to convert the Policy, Ameritas seeks to impair the value of the Policy and prevent or restrict Mr. Moghadam and other individuals from selling their policies,” reads the rejoinder. “That is because if the buyer of the Policy must have an insurable interest to exercise the conversion privilege, the Policy would be stripped of its valuable conversion right upon sale.”

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.