BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1212|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: SB 1212
Author: Calderon (D)
Amended: 3/26/12
Vote: 21
SENATE INSURANCE COMMITTEE : 5-0, 5/9/12
AYES: Calderon, Gaines, Corbett, Lieu, Price
NO VOTE RECORDED: Anderson, Correa, Lowenthal, Wyland
SUBJECT : Insurance
SOURCE : Author
DIGEST : This bill excludes 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.
ANALYSIS : 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
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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 excludes 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.
Background
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. 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). The policy then is not a wager and,
presumably, the policyholder still has cause to wish the
insured a long life.
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.
STOLI and SB 98 . The stability of the life settlement
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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 98 (Calderon), 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.
Prohibiting life settlements before two-years after the
policy is issued.
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." This bill clarifies that
section by recognizing that STOLI arrangements, as defined
in Insurance Code Section 10113.1, are excepted from its
provisions.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
ARGUMENTS IN SUPPORT : According to the author's office,
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.
JJA:nl:d 5/14/12 Senate Floor Analyses
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SUPPORT/OPPOSITION: NONE RECEIVED
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