NEW YORK (Bloomberg) — Insurance commissioners around the US agreed to ask for stronger state laws to prevent people from taking out life insurance policies with the sole intent of selling them to speculators.The National Association of Insurance Commissioners yesterday revised model legislation affecting so-called stranger-originated life insurance. Under "STOLI," policies are created for resale to investors including hedge funds that have no relationship to the insured. The US insurance industry is regulated at the state level, and legislatures can approve, modify or reject the model.

The association's prior model was adopted by 35 states. The latest proposal imposes further limits on who can sell their policies and when, in an effort to eliminate the incentive for speculation.

"STOLI perverts the social purpose of life insurance," Frank Keating, president of the Washington-based American Council of Life Insurers, said in a statement. "The NAIC sends a clear signal that these transactions will not be tolerated."

Companies including MetLife Inc., the largest US life insurer, have said investor involvement became rampant in recent years. American International Group Inc., the world's largest insurer, in December said it effectively stopped selling universal life policies to older consumers because so many were being resold.

In a typical stranger-originated transaction, an elderly person is loaned money to buy life insurance with at least a $1 million death benefit, putting up only the policy as collateral. After the two-year period during which the insurance company can contest the policy, it's sold to investors. The proceeds repay the loan and brokers' fees, with the rest pocketed by the insured.

Investors continue to pay the premiums and ultimately collect the death benefit. They are betting the policies are under priced, presenting an arbitrage opportunity, in part because the majority of policies lapse without paying death benefits.

The new model legislation imposes a five-year ban on reselling policies that are paid for by strangers. A policy bought with the insured's own money or a collateralised loan could be sold after two years.