A Breakdown of Stranger-Originated Life Insurance (STOLI)

Jul 10, 2019 12:57:00 PM / by LISA

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What is Life Settlement Fraud?

As with all important business transactions, policy owners and insureds must be careful not to be the victim of fraud or to commit fraud in connection with a life settlement. Individual policy owners and insureds are often older individuals who may be particularly vulnerable to fraud schemes. LISA and the entire life settlement industry want to help older adults avoid such circumstances.

The life settlement industry has observed a particular kind of transaction associated with life insurance policies and wants policyholders to be aware of it.

What is STOLI Insurance?

STOLI, or Stranger-Owned Life Insurance describes an arrangement where an individual holds a life insurance policy on another without documented insurable interest. STOLI usually involves an older person being approached by a licensed life insurance agent or another party to obtain new life insurance, with the policy being controlled, from the start and paid for by a third party. Some older individuals may even be offered compensation for his or her participation as the insured. This is a method for investors to bypass the insurable interest requirement needed to purchase a life insurance policy.

What makes this problematic is that the New York Insurance Law prohibits a person from initiating or facilitating the issuance of an insurance policy for the intended benefit of a person who, at the time when the policy is issued, has no insurable interest in the life of the person being insured.

What are STOLI transactions?

Simply put, a STOLI transaction occurs when an investor approaches an individual to purchase their life insurance policy with the sole intention of selling it. The investor will then take over the monthly premium payments associated with the policy, while the previous policyholder receives an agreed-upon lump sum payment. 

What is the purpose of STOLI?

Stranger-originated life insurance policies are seen as prime investment opportunities, especially for those in waning health. The investor is able to pay a fixed premium per month in exchange for a guaranteed death benefit upon the insured persons passing. 

Can you take out a life insurance policy on a stranger?

The short answer is no, you cannot take out a policy on someone you don’t know or have never met. However, you can take out a policy on anyone with whom you have insurable interest and their explicit consent. The insured person must present their signature and submit medical records in order for the policy to take effect. 

In New York, an insurable interest exists:

  • Between close family members who are related by blood or by law; or
  • When the owner of the policy has a substantial economic interest in the continued well-being of the person being insured if they are not related.

Be wary of any life insurance agent wanting to sell you a life insurance policy if you are told you:

  • Do not have to pay the premiums,
  • Would not be liable if someone else provides funds to pay premiums, or
  • Will be paid to participate.

Although you may feel like you would be the victim of such a scheme or any insurance fraud, you may also be viewed as a participant depending on the circumstances, and there are consequences to those who participate in such activities, ranging from the cost and inconvenience of investigations to fines and criminal prosecution.

  • Be sure to ask questions if you are approached or asked to participate in a transaction that sounds too good to be true.
  • Be certain that you answer all questions asked on a life settlement application with true, accurate, complete responses.
  • False or misleading information may be considered an attempt to defraud the insurer, the life settlement company, or both, which could also lead to consequences like the ones described above.
  • Make sure you don’t leave any blanks on a life insurance or life settlement application that could later be filled in without your permission or knowledge.

Any person who knowingly presents false information with the intent to defraud on an application for a life settlement contract is guilty of a crime and may be subject to fines and criminal prosecution. This includes false information about health and financial status. You or your estate may also become liable for money damages payable to persons or companies harmed by fraud. Participation in an attempt to defraud an insurer or a life settlement company may make it difficult or impossible to obtain insurance in the future.

Tags: STOLI, Stranger-Originated Life Insurance

LISA

Written by LISA