Steven Brasner and Stranger Owned Life Insurance

Life insurance is often viewed as a necessary evil to protect families and their estates. With consumers already suspect of whether or not the insurance agent is selling the coverage for themselves or for the client has entered more than one person’s thoughts. With that said, the insurance industry and its agents have done very little to change this perception. Case-and-point is a recent article printed in the Wall Street Journal article regarding Steven M. Brasner, appropriately title “Regulators Rein In Murky Life Policies.”

Mr. Brasner has been arrested on 22 counts of alleged grand theft according to the article. He has been accused of falsifying applicants’ financial net worth in order to receive more death benefit then they would otherwise be eligible to acquire.

The strategy promoted by Mr. Brasner allowed individuals age 70 and over to apply for a life insurance policy. Provided the insured received a favorable health class rating from the issuing insurance company, he would arrange for a third party to “finance” the life insurance premiums. The financed loan was non-recourse to the insured and did not require any premium payments. The client was not required to pledge any collateral other than the life insurance policy itself. However, the design of the policy typically did not have any cash value.

So how were the funders able to use the policy as collateral for the loan?

In 2004, various hedge funds and financing sources were looking for alternative investments. With the emergence of the life settlement industry the financiers were able to create what they thought would be an excellent arbitrage opportunity. The financiers would analyze two sets of information to make a decision as to whether or not it made sense to provide the premiums on any given policy.

For example, if the cost or premiums to fund a policy for a 2-year period were $250,000 on a $5 million policy, or 5 percent ($250,000 divided by $5,000,000) of the death benefit, the premium source would determine if they could sell the policy for an amount greater than the loan, interest, and expenses accumulated over that period. After completing a cost analysis of the policy, they would analyze a life expectancy report completed by a third party actuarial firm using the same health information used by the life insurance carrier to make their decision. Based on the cost to maintain the policy and the anticipated life expectancy of the insured they could project what the value of the policy would be in 2-years.

Now, the lending terms on the non-recourse loan were arguably egregious. The financier would “lend” the $250,000 subject to an interest rate of 15% (this rate would vary from financier to financier, but was usually never less than 12%). The loan would often include an origination fee of $25,000, and establishing a new trust to own and be the beneficiary of the life insurance policy.

On a $250,000 loan, over a 2-year period, with a borrowing rate of 15% and origination fee of $25,000, the outstanding loan balance at the end of year two would be $355,625 or 7.11% of the $5 million death benefit. If after review of the life expectancy report it was determined the anticipated value of the policy to a life settlement company after a 2-year period exceeded the loaned premium plus interest and other costs they would move ahead and finance the policy.

Life settlement companies provided financiers with an exit strategy to the life insurance policy while the insured was still living.

What was the benefit to the insured?

This strategy was referred to as stranger-owned life insurance (STOLI or SOLI), non-recourse premium financing, speculator initiated life insurance (SPINLIFE), or investor owned life insurance (IOLI). The benefit to the insured was the promise of cash.

In our example above, if the $5 million policy was sold for 20% of the death benefit or $1 million, the insured would receive $1 million less the outstanding loan balance to the financier, or $644,375. This seems like a pretty good deal, but there were a lot of questions swirling around about insurable interest, use of insurance capacity, and fraudulent practices.

To put this in perspective the insured had little, if any, risk to participate in this transaction because the loan was non-recourse. If the life settlement offer did not exceed the outstanding loan balance to the financier the insured could walk away, no harm, no foul. When STOLI first emerged there was very little insurance companies could do to prevent it from happening. If the financier was able to satisfy insurable interest issues there was arguably no law preventing the transaction from occurring.

As the STOLI industry evolved, life insurance carriers began to take protective measures to make sure the policy being purchased was not a part of a STOLI transaction. They did this by requiring the insured and owner of the policy to disclose whether or not they were acquiring the coverage with the intent of selling it. The insurance carriers also began to ask if the source of premium was being borrowed, and, if so, from who, and whether or not they would be required to pledge collateral. Any indication of participation in a STOLI transaction would result in the insurance carrier not issuing a policy. If the agent indicated they did not have an intent to sell the policy and were not using STOLI financing for the policy, and then did, this would result in a fraudulent statement by the insured, owner, and agent of the policy.

What does this have to do  with Steven Brasner facing 22 counts of alleged grand theft?

In order to participate in a STOLI transaction the insured would typically be required to obtain a minimum of $5 million of life insurance coverage. In order for an individual over the age of 70 to qualify for a $5 million life insurance policy they would have to have a financial net worth in excess of $5 million. In order to accept this risk, an insurance carrier oftentimes requires third party verification of financial net worth from the insured’s accountant or attorney.

Allegedly, Mr. Brasner’s first mistakes were that he never provided any indication on the life insurance application that money was being borrowed to fund premiums, and he indicated there was not an intent to sell the coverage. The other allegations are that Mr. Brasner falsified information about the insured’s financial net worth, not only to the insurance carrier, but to the financier.

According to the article Mr. Brasner has denied knowingly providing any falsified financial information. Over the period of 2004 – 2008 there were a number of agents who promoted this idea. What we are seeing now is the damage done as a result of greed by insurance agents, financiers, and in some cases the insured’s who participated in these transactions. Like the mortgage industry, the life settlement industry has felt crunch of the economy. The high offers once made for these policies have since been reduced or eliminated, leaving many financiers searching for ways to recover their investments.

Our firm never participated in any of these transactions due there nature, and our belief that they were not in the best interest of our client or the life insurance carrier. There were also other deviations of this strategy not discussed in this post. If you have participated in a STOLI transaction, and are unsure of how to exit it, we are available to discuss your options by phone on a complimentary basis.

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