Who's cashing in on life insurance policies aimed at elderly?

In a State Capitol hearing room crowded with lawyers and lobbyists, the focus at one point turned to -- of all people -- CNN icon Larry King.

The debate: Does a lack of state regulation leave Minnesotans prey to the kind of elaborate life insurance scheme that King says he fell for several years ago?

Some of the state's largest insurance companies are pushing to have so-called stranger-originated life insurance, or STOLI, outlawed in Minnesota. A ban on the arrangements, which a leading state senator called nothing short of "perverse," won approval last week from a Senate committee.

In typical STOLI transactions, speculators persuade the elderly -- especially those with limited life expectancies -- to take out life insurance policies, commonly offering large cash payouts in exchange for having the speculators named as the policy's beneficiary, usually after two years.

"It's nothing more than a wager on human life," said Robyn Rowen, executive director of the Minnesota Insurance and Financial Services Council.

Some of the world's largest financial firms, such as Deutsche Bank and Goldman Sachs, have become large players in the bundling of so-called life insurance settlements for sale in investment markets.

With 31 registered lobbyists on insurance issues walking the halls at the State Capitol, and with billions of dollars at stake nationwide, the fight is pitting the well-financed insurance lobby against the lesser-known, but fast-growing life insurance settlement industry. Minnesota is seen as the latest battleground as legislatures around the country consider how far to go to regulate the practice.

Defenders of life settlement arrangements are fighting back, saying the nation's largest insurance companies are using isolated horror stories -- such as King's -- because they fear millions in losses should more senior citizens needing money turn to legitimate life settlement agreements.

If more policyholders use life settlements, advocates contend, fewer will do what insurance companies secretly desire. Often, they say, elderly policyholders under financial stress or with no remaining heirs let policies lapse and never collect a benefit despite years of paying premiums. Others surrender their policies to insurance firms for nominal money.

King made headlines when he filed a federal lawsuit alleging that he sold two life insurance policies totaling $15 million for a $1.4 million cash payout. The talk show host said he was initially steered into buying one of the policies, valued at $10 million, by a life settlement firm and sold it to the firm for $550,000. While King said he was misled as to how the move affected his "future uninsurability," he said the firm pocketed fees totaling more than $550,000.

To counter King's story, the life insurance settlement industry presented to lawmakers two Minnesotans who said life settlements helped them.

Appearing before a state Senate panel, Carl Wolk, 75, of Minnetonka, said financial reversals in 2007 left him unable to afford premiums on his life insurance policies. He sold them to speculators for a cash settlement he chose not to disclose. But he said it was enough to "enable myself and my wife to be comfortable."

Interest group showdown

The issue may affect ordinary people along with celebrities, but the battle rages between powerful interests.

"Minnesota has a large insurance lobby ... they certainly have access," said Michael Abrams, whose Minneapolis company specializes in life insurance settlements.

Abrams and his allies have access, too. Larkin Hoffman, a leading law firm in Minnesota, represents Coventry, a Philadelphia company that is a significant player in the life insurance settlement field. Coventry ended up with one of King's policies.

How much the new industry is making is unclear. Jon Sabes, who represents a life settlement provider in Minneapolis and testified before the Senate panel, described his company's return as "higher than 10 percent, lower than 15 percent."

The controversy has put the spotlight on Sen. Linda Scheid, DFL-Brooklyn Park, the legislation's author who told the Senate panel she feels "pretty passionately" about the debate. Douglas Head, the executive director of the Life Insurance Settlement Association, who flew in from Florida for the hearing, complained that lobbyists for the state's major insurance companies had "played a role in helping Senator Scheid to draft her bill."

But Bruce Ferguson, the senior vice president of the American Council of Life Insurers, said anyone suspicious of whether life settlements take advantage of the elderly needed to simply "follow the money. Where's the money coming from, and where's the money ending up?"