Stranger-Originated Life Insurance (STOLI) is a controversial life insurance policy that has been gaining attention in recent years. It is a type of policy where a stranger, someone who has no insurable interest in the life of the insured, initiates and purchases a life insurance policy on someone else’s life.
The idea behind STOLI is that the stranger purchases the policy, pays the premiums, and then sells the policy to a third party who is interested in investing in the policy. In this scenario, the stranger makes a profit, and the third party receives the death benefit when the insured passes away. While this may sound like a win-win situation, it is essential to note that STOLI policies have been deemed unethical and, in some cases, illegal.
One of the main issues with STOLI policies is that they are often initiated without the knowledge or consent of the insured. The stranger who purchases the policy may misrepresent themselves to the insured or deceive them into signing the necessary paperwork. This is often done by offering the insured a monetary incentive or falsely portraying the policy as a way to help them with estate planning.
Another issue with STOLI policies is that they can lead to a moral hazard. A moral hazard occurs when a person takes on additional risk because they are protected by insurance. In the case of STOLI policies, the stranger who purchases the policy has no insurable interest in the life of the insured. This means that they have no reason to act in the insured’s best interest or take measures to protect their life. In fact, the stranger may be incentivized to take actions that increase the likelihood of the insured’s death so that they can collect the death benefit.
STOLI policies can also lead to adverse selection, which occurs when individuals who are more likely to need insurance are the ones who purchase it. In the case of STOLI policies, the insured may be older, in poor health, or have a shorter life expectancy. This makes the policy more attractive to investors because they can receive the death benefit sooner rather than later. However, it also means that the premiums for the policy may be higher, and the insured may not receive the same level of benefits as they would with a traditional life insurance policy.
Additionally, STOLI policies can be illegal in some states. In many states, it is illegal to purchase a life insurance policy with the intent to sell it to a third party. This is because it violates the insurable interest doctrine, which states that a person must have an insurable interest in the life of the insured to purchase a life insurance policy. Insurable interest refers to the financial or emotional stake that a person has in the life of the insured. For example, a spouse or business partner may have an insurable interest in the life of the insured because they depend on their income or services.
Case in Point of Stranger-Originated Life Insurance
In a case involving STOLI, Sun Life Assurance Co. of Canada v. Wells Fargo Bank, stranger-oriented rules are “against public policy, and are void ab initio, that is from the beginning.” The Sun Life case featured multimillion-dollar universal life insurance policies on the lives of elderly persons that were granted in 2006 and 2007, according to the lawsuit. The lawsuit claims that both were granted to New Jersey trusts with the insured’s grandsons serving as trustees, used the same insurance broker, and were issued to the same address. Additionally, the suit claims both were issued based on net worth and income data from alleged accountants who either did not exist, were not accountants, or had no relationship to the insured.
Stranger-Originated Life Insurance (STOLI) policies are controversial and have been deemed unethical and illegal in some cases. It is essential for individuals to understand the risks associated with STOLI policies and to consult with an attorney like Andrew Maze for legal guidance. It is also important for insurance companies, regulators, and attorneys to take steps to prevent the initiation and sale of STOLI policies to protect consumers.