Three states have passed laws targeting the controversial transactions called stranger-originated life insurance (STOLI).

Minnesota, Nevada and Vermont have passed what two industry trade groups opposing STOLI called “carefully-crafted statutes that would reduce the economic incentive for these transactions.” The American Council of Life Insurers and the National Association of Insurance and Financial Advisors support all three bills.

The bills approved in Vermont, one of the strongest in the nation, and Nevada feature a targeted five-year moratorium on the settlement of life insurance policies that have the characteristics of STOLI. The moratorium only applies to STOLI policies and would not affect policy owners who purchased life insurance in good faith.

With the addition of these three states, 21 states have now approved laws opposing STOLI.

The life insurance industry has been opposed to STOLI because it enables third parties to benefit from the transactions. In STOLI transactions, financial speculators such as hedge funds or their representatives get senior citizens to purchase life insurance so they can transfer the death benefits to the speculators. The speculators pay the premiums and hope to profit when the seniors die. The sooner the seniors die, the higher the profit.

“These schemes are designed to evade state insurable interest statutes which say that life insurance should only be purchased by those who would suffer financially by the death of the insured, and not by speculators who would profit by it,” the ACLI and NAIFA said in a joint statement on the laws.

Gov. Jim Douglas, a Republican, signed the Vermont bill into law June 1, while the Nevada bill was signed by Gov. Jim Gibbons, also a Republican, May 29. Gov. Tim Pawlenty, also a Republican, signed the Minnesota bill featuring a four-year moratorium on the settlement of STOLI-related policies earlier in May.

“STOLI transactions are fraudulent, and the seniors caught up in these schemes face unexpected taxes, loss of privacy and legal liability. The speculators promoting STOLI may induce the seniors to lie on policy applications, and sign their names to the lie, just so the speculators can reap huge profits,” said Frank Keating, president and CEO of the ACLI.

“Especially in these difficult economic times when many seniors may be vulnerable to the come-ons of these speculators, it is gratifying to see that states like Vermont, Nevada and Minnesota are stepping up to provide seniors a high level of protection,” said Cliff F. Wilson, president of the National Association of NAIFA, said in a statement.