Illinois Tightens Viatical Settlement Rules, Bans STOLI

Illinois adopted a new law increasing disclosure and supervision rules for viatical settlements and prohibiting stranger-originated life insurance transactions.

Illinois Insurance Director Michael McRaith said S.B. 2091 will impose "aggressive" disclosure obligations, supervision requirements and professional licensing and ethics standards. "While allowing legitimate estate-planning practices, the law protects our seniors as they deserve," he said in a statement.

In viatical settlements, policyholders sell an existing policy for a cash payment of less than the full amount of the death benefit. STOLI transactions, as defined by the National Conference of Insurance Legislators and others, involve the initiation of a life insurance policy for the benefit of a third-party investor who has no insurable interest in the insured. Seniors are often targeted in STOLI schemes.

S.B. 2091 allows policies to be sold on the secondary market after two years.

"This bill, which was negotiated for three years, results in a good regulatory environment that will protect seniors from abusive STOLI transactions while protecting legitimate transactions in the life insurance and life settlement industries," state Sen. William R. Haine, D-Alton, a sponsor of the legislation, said in a statement.

Bruce Ferguson, senior vice president of state relations for the American Council of Life Insurers, welcomed the law, saying he is confident state officials "will do everything possible to protect seniors from abusive STOLI transactions."

But Ferguson expressed some concern that while the Illinois language closely tracks NCOIL model law language, it did not adopt the NCOIL definition of STOLI in full. "We would hate to see a scenario in which the perpetrators of STOLI use these deviations as a means for trying to prevent Director McRaith and the Illinois Department from protecting seniors," Ferguson said.

In the past three years, nearly half of U.S. states have adopted anti-STOLI measures, according to the ACLI.

(By Sean P. Carr, Washington Correspondent: [email protected])