Stranger-Originated Life Insurance: Legal Or Not?

Stranger-originated life insurance (STOLI) is an illegal practice in the US. STOLI policies are promoted to consumers between the ages of 65 and 85, who may sell their life insurance policies for immediate cash. The buyer of the policy becomes the new owner, pays future premiums, and collects the death benefit when the insured dies. The primary feature of a STOLI arrangement is that the insurance is purchased as an investment vehicle rather than for the benefit of the policy owner's beneficiaries. This circumvents the insurable interest requirement, which states that the owner of a life insurance policy must have a financial interest in the life of the insured.

Stranger-originated life insurance (STOLI) is illegal in the US

STOLI policies are generally purchased by investors who have no existing relationship with the insured. The purchaser buys life insurance as an investment rather than to protect against the financial impact of the insured's death. This type of policy is often marketed to seniors, who are lured by promises of "no-cost" and "risk-free" benefits. They are incentivized by cash bonuses and free meals to sign up for life insurance policies, which are then sold to investors.

STOLI policies are considered unethical as they allow strangers to profit from another person's death. They also create a moral hazard, where the policy owner has no interest in the insured's well-being and may even be incentivized to take actions that increase the likelihood of the insured's death.

STOLI arrangements are broadly illegal in the US, with many states enacting laws specifically outlawing the practice. The National Association of Insurance Commissioners (NAIC) proposed sample legislation in 2007 for states to adopt to ban these policies. Most states have since implemented STOLI-related laws, and several states have provisions to retroactively cancel existing life insurance policies if they are found to be STOLIs.

STOLI is considered human life wagering

Stranger-Originated Life Insurance (STOLI) is considered human life wagering because it involves investors purchasing life insurance policies on the lives of strangers, with the sole intention of profiting from their eventual death benefits. This practice is controversial and raises ethical concerns as it is akin to gambling on someone's life.

STOLI arrangements typically target seniors or individuals with limited life expectancy. Investors or brokers offer financial incentives to these individuals, such as upfront payments or "free" insurance for a period, in exchange for their participation. The investors then purchase life insurance policies on their lives, often with exaggerated financial information, and pay the premiums. After a certain period, the policy is transferred to the investor or sold in the secondary market. Upon the insured's death, the investor collects the death benefit.

The main issue with STOLI is that it circumvents the insurable interest requirement of purchasing life insurance. Life insurance is intended to protect beneficiaries from financial loss upon the unexpected death of the insured. In a wagering contract, the investor has no interest in the continued life of the insured and, in fact, benefits from their early death. This creates an unethical situation where the policyholder has more interest in the insured dying sooner rather than later.

STOLI arrangements have a long history, dating back to at least the 18th century when Great Britain enacted the Life Insurance Act of 1774 to prevent abuse. The legislative and public policy history against wagering contracts is well-established, and today, most US states have regulations or laws banning or limiting STOLI practices due to ethical concerns and the potential for fraud.

In summary, STOLI is considered human life wagering because it allows investors to speculate on the lives of strangers, creating an incentive for early death and violating the foundational principles of legitimate life insurance contracts.

Seniors are often targeted by STOLI scams

Stranger-originated life insurance (STOLI) is a type of insurance fraud that targets seniors. Seniors are often targeted by these scams because fraudsters believe they have a significant amount of money in the bank. STOLI is a premium-financed life insurance policy, where a third party pays the premiums. The primary feature of a STOLI arrangement is that the insurance is purchased as an investment vehicle, rather than to provide financial support for the insured's beneficiaries.

In a typical STOLI scam, an investor or representative induces a senior citizen to purchase a life insurance policy that they would not normally buy. The senior applies for the policy with the understanding that after a certain period, they will need to pay the premiums or give up the policy to the investor or another third party. The investor arranges financing for the premiums during the time the senior owns the policy, usually through non-recourse premium financing, where the insurance policy itself is the only collateral for the loan. The senior is not responsible for any premium payments.

STOLI is marketed to seniors as "free life insurance" because they will not have to pay premiums and will get a life insurance policy for a limited period, usually 2-3 years. However, this is a scam as the senior will not be able to get another life insurance policy during that time, and if their health deteriorates, they may not be able to get a new policy after that period. Seniors who are victims of STOLI scams may also face difficulties obtaining legitimate life insurance in the future.

To fight back against STOLI scams, seniors can sell their policies themselves to benefit from the current market value rather than let the STOLI businesses profit. They should consider selling the policy six months ahead of the loan maturity date, as waiting until the maturity date may result in the lender foreclosing on the policy and reaping the windfall. If a senior's health has improved since they took out the policy, they are unlikely to make money by selling it. However, if their health has deteriorated, the policy may be valuable, and they should sell it through a broker.

STOLI scams are illegal in many places due to their unethical nature. They bypass the insurable interest requirement, which mandates that the policy owner has a financial interest in the continued life of the insured. STOLI arrangements are also considered unethical as they allow gambling on the lives of others.

STOLI policies are often sold by people with life-threatening illnesses

Stranger-originated life insurance (STOLI) is a policy that someone, usually an investor, buys for a stranger. The buyer is purchasing life insurance as an investment rather than to protect themselves from financial hardship due to the death of the insured. STOLI policies are generally illegal because they allow the policyholder to benefit from a stranger's death.

At one time, most STOLIs were sold by people with life-threatening illnesses. Now, they are often promoted to individuals between the ages of 65 and 85 who are not facing a health crisis. These policies are typically marketed under names such as "zero premium life insurance", "estate maximization plans", or "no cost to the insured plans".

In the past, STOLI policies were sometimes marketed to older individuals or those with life-threatening illnesses as a way to generate cash. However, it is important to consider all options before selling a life insurance policy. Selling a policy may affect eligibility for future insurance and may have tax implications. Additionally, creditors could claim the cash settlement, and public assistance benefits could be lost.

STOLI policies are considered unethical as they allow gambling on the lives of others. The policyholder has a financial interest in the insured dying as soon as possible, which creates an uncomfortable situation. To buy life insurance on someone else legally, you must have an insurable interest, meaning you would suffer financial hardship due to their death. This typically includes family members or business owners insuring key employees.

STOLI is distinct from life settlements

Stranger-Originated Life Insurance (STOLI) is distinct from life settlements, also known as viaticals. While both involve third parties in life insurance policies, they differ in their origin, purpose, and legal status.

STOLI refers to the sale of a life insurance policy to a third party, where the buyer becomes the new owner of the policy, pays future premiums, and collects the death benefit when the insured dies. This type of arrangement is generally illegal because it violates the insurable interest requirement, which mandates that the policy owner has a direct relationship or interest in the continued life of the insured. STOLI practices are considered unethical as they allow gambling on the lives of others and can lead to potential fraud.

On the other hand, life settlements involve an existing policyholder, typically a senior, selling their life insurance policy to a third party for a lump sum. The original policyholder may choose to do this because they no longer need the policy, can't afford the premiums, or want to access the cash value. The third party then assumes responsibility for future premium payments and becomes the beneficiary, collecting the death benefit upon the insured's death. Life settlements are legal in most states in the US but illegal in most of Canada.

The key difference lies in the intent behind the transaction. STOLI is initiated by investors who aim to profit from the death benefit, whereas life settlements involve the sale of an existing policy that was originally purchased for genuine insurance purposes. While STOLI offers immediate financial gains for the insured, it also carries potential tax implications and may limit future insurability. Life settlements, on the other hand, provide a way for policyholders to access cash from their policies without having to sell them to a third party.

In summary, while both STOLI and life settlements involve third parties in life insurance policies, they differ significantly in their origin, purpose, and legal status. STOLI is generally illegal due to ethical and legal concerns, while life settlements are legal in most states and provide a legitimate option for policyholders to monetise their policies.

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