New York legislators approved legislation to protect consumers against stranger-originated life insurance transactions.

If Gov. David A. Paterson signs S.66009/A.40009, New York will become the 27th state to adopt an anti-STOLI law. The bill has the support of the American Council of Life Insurers, the National Association of Insurance and Financial Advisors and the Life Insurance Council of New York, as well as representatives of the life settlement industry.

Based on a model law from the National Conference of Insurance Legislators, the bill defines STOLI as a fraudulent act and provides insurance regulators with additional tools to discover such transactions. The bill also mandates that consumers be provided with specific information on STOLI and life settlements. Life settlement providers would be required to become licensed and registered with the insurance department.

While the bill won unanimous approval from legislators, the final product was the result of years of debate over penalty and disclosure provisions, ACLI spokesman Jack Dolan said. "It's interesting in the legislative process that a seemingly sailed-through bill required lots of build-up," he said.

In a typical life insurance settlement, a policy purchased in good faith but no longer wanted or needed is sold to a third party. In STOLI transactions, financial speculators or their representatives induce senior citizens to purchase life insurance, policies the seniors otherwise would not obtain, with the intent of transferring the death benefits to the speculators at a later date. Senior citizens are often targeted for such transactions through fraud or pressure, and can be left vulnerable to unexpected taxes and fees, loss of privacy and other concerns.

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. In a common type of STOLI transaction, a person with no insurable interest in another persuades the other person to obtain life insurance with the understanding that after a certain time, the insured will sell the policy to the stranger.

In October, California Gov. Arnold Schwarzenegger signed legislation to rein in STOLI (BestWire, Oct. 12, 2009).