BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 1212 (Calderon) Hearing Date: May 9, 2012
As Amended: March 26, 2012
Fiscal: No
Urgency: No
SUMMARY: Would exclude "stranger-originated life insurance"
from Insurance Code Section 10110.1 authorizing an individual to
take out a policy of insurance on his or her own life and to
have that policy made payable to whomsoever he or she pleases.
DIGEST
Existing law
1. Provides that an individual has an unlimited insurable
interest in his or her own life, health, and bodily safety
and may lawfully take out a policy of insurance on his or
her own life, health, or bodily safety and have the policy
made payable to whomsoever he or she pleases, regardless of
whether the beneficiary designated has an insurable
interest, as specified;
2. Defines "stranger-originated life insurance" (STOLI) as
an act, practice, or arrangement to initiate the issuance
of a life insurance policy in this state for the benefit of
a third-party investor who, at the time of policy
origination, has no insurable interest, under the laws of
this state, in the life of the insured.
This bill
1. Would exclude STOLI from the provision authorizing an
individual to lawfully take out a policy of insurance on
his or her own life, health, or bodily safety and have the
policy made payable to whomsoever he or she pleases,
regardless of whether the beneficiary designated has an
insurable interest.
SB 1212 (Calderon), Page 2
COMMENTS
1. Purpose of the bill . According to the author, this bill
clarifies existing law by excluding STOLI policies from the
strong language of Insurance Code Section 10110.1 providing
that an individual may take out a life insurance policy on
his or her own life and name "whomsoever he or she pleases"
as a beneficiary of a life insurance policy.
SB 1212 (Calderon), Page 3
2. Background
a. Insurable Interest. When speaking of life
insurance, an insurable interest is an interest based
upon a reasonable expectation of pecuniary advantage
through the continued life, health, or bodily safety of
another person and that the death of that person will
result in a loss. (Ins. Code � 10110.1(a).) If a policy
is taken out on another individual (such as on a parent
or spouse), a policy holder must have an insurable
interest in the individual insured at the time the policy
becomes effective (although not necessarily at the time
the loss occurs). (Ins. Code �� 10110.1(f) and (g).)
The policy then is not a wager and, presumably, the
policyholder still has cause to wish the insured a long
life.
b. Life Settlements. A life settlement is a financial
transaction in which an owner of a life insurance policy
sells the policy to a third party for more than the cash
value offered by the life insurance company. The
purchaser becomes the new beneficiary of the policy at
maturity and is responsible for all subsequent premium
payments.
Senior citizens are the primary market for life
settlements, including those who might be planning to
surrender a life insurance policy or let it lapse, or
intend to sell the policy to use the proceeds for other
purposes. Life settlements can be highly complex
transactions and have may significant benefits, or
serious negative effects, for seniors involved.
c. STOLI and SB 98. The stability of the life
settlement agreements and potential for high returns
makes such investments attractive. STOLI arrangements
are life insurance contracts initiated for the benefit of
a third-party investor who, at the time of policy
origination, has no "insurable interest" in the insured.
Since the beneficiary has no real connection to the
insured, STOLI arrangements are essentially gambling on
the life of a stranger and undermine the integrity of the
life insurance market.
SB 1212 (Calderon), Page 4
SB 98 (Calderon) enacted as Chapter 343, Statutes of
2009, established formal protections against STOLI
practices, including:
Prohibiting STOLI as a fraudulent life
settlement;
Requiring a license to enter into, broker, or
solicit life settlements;
Providing a rescission period; and
Prohibiting life settlements before two-years
after the policy is issued.
a. Insurance Code Section 10110.1. Insurance Code
Section 10110.1 provides that an individual may have a
life insurance policy "made payable to whomsoever he or
she pleases, regardless of whether the beneficiary
designated has an insurable interest." SB 1212 clarifies
that section by recognizing that STOLI arrangements, as
defined in Insurance Code Section 10113.1, are excepted
from its provisions.
1. Summary of Arguments in Support
The author states that Insurance Code Section 10110.1
contains strong language that may give the false impression
that STOLI arrangement are valid. SB 1212 clarifies that
language and puts any reader on notice that STOLI
arrangements do not satisfy the insurable interest
requirement for an enforceable life insurance policy.
2. Summary of Arguments in Opposition
None received (as of noon on May 4, 2012)
POSITIONS
SB 1212 (Calderon), Page 5
Support
None received (as of noon on May 4, 2012)
Oppose
None received (as of noon on May 4, 2012)
Consultant: Hugh Slayden, (916) 651-4773