California Gov. Arnold Schwarzenegger signed legislation to rein in the practice of stranger-originated life insurance transactions.

The new law requires licensing of professionals who transact life settlement contracts and mandates specific disclosures to consumers, including alternatives to life settlements. Marketing or issuing a new life insurance policy for the purpose of settling the policy would be barred; most transactions within the first two years of a policy are also restricted. The law establishes a statutory definition of STOLI and classifies it as a fraudulent act. It also allows the California Insurance Department to collect information from life settlement providers that will help it monitor the market and identify STOLI.

Authored by state Sen. Ron Calderon, D-Montebello, S.B. 98 cleared the state Assembly 72-1 and the Senate, 40-0. Based on a National Conference of Insurance Legislators model law, it is the state's first legislation regulating life settlements. Schwarzenegger vetoed a similar bill last year in the aftermath of a lengthy state budget stalemate with lawmakers (BestWire, Oct. 2, 2008).

"At its core, a STOLI transaction is a wager on human life and violates the most basic principle of life insurance," Brad Wenger, president of the Association of California Life and Health Insurance Companies, said in a statement. "Life insurance provides for the dependents of the policyholder in the event of his or her death. It is not intended to profit investors when someone dies sooner rather than later."

The American Council of Life Insurers supported the legislation in concept, but cited "significant" concerns in a letter to Calderon. ACLI warned that deviations from the NCOIL model ? including restrictions on an insurer's ability to reject an application when premium financing is used ? could render it ineffective. Third-party premium financing is typically involved in STOLI transactions, according to ACLI (BestWire, Sept. 14, 2009).

As defined by the NCOIL model, STOLI is a practice or plan to initiate a life insurance policy for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest in the insured. Senior citizens are often targeted for such transactions, which critics contend are entered into through fraud and pressure by the investor, and can violate insurable interest laws and leave seniors and their beneficiaries vulnerable to unexpected taxes and fees, loss of privacy and other concerns.

"Legislation to curb STOLI transactions and establish new consumer protections has now been enacted in 26 states and is pending in 13 others," John Mangan, ACLI regional vice president, said in a statement. "We are grateful to the governor and the California Legislature for their efforts to protect seniors from these fraudulent investment schemes."