Stranger-Originated Life Insurance Basics and Risks

Stranger-originated life insurance can be a complex and misunderstood topic. This type of insurance is often created for the sole purpose of investing in real estate.

Stranger-originated life insurance policies are typically created by investors who purchase a life insurance policy on a stranger's life, usually a person with good credit and a stable income. This is often done to obtain a large loan from a lender.

The lender views the life insurance policy as collateral, allowing them to lend a larger amount of money than they normally would. The policy's cash value is used to secure the loan, and the borrower pays interest on the loan.

Stranger-originated life insurance policies can be risky for the lender, as the policy's cash value can fluctuate and the borrower may default on the loan.

Stranger-originated life insurance, or STOLI, is a type of life insurance policy purchased by someone who doesn't have a genuine financial interest in the person whose life is insured.

Stranger-originated life insurance is often promoted to consumers between the age of 65 and 85, and it's typically purchased as an investment vehicle rather than for the benefit of the policy owner's beneficiaries.

STOLI arrangements can be called various names, including "zero premium life insurance", "estate maximization plans", "no cost to the insured plans", "new issue life settlements", "high-net-worth settlements", "non recourse premium finance transactions" or "death bets".

A STOLI transaction requires the cooperation of the insured, who may be asked to allow access to their medical records.

The policy owner may also be paid a fee for taking out the policy, which can make the arrangement even more suspicious.

STOLI policies are generally illegal because they're seen as an uncomfortable arrangement where someone is buying life insurance on another person without a genuine financial interest in their life.

STOLIs create an unethical situation where the policy owner has more interest in the insured dying sooner for the death benefit.

The policyholder may have more interest in the insured's death because they don't have an insurable interest in the person's life.

Having insurable interest keeps corporate-owned life insurance (COLI) legal and, to some, ethical.

The financial value of the employee/insured to the company gives the employer interest in the insured's continued health and well-being.

Companies may give employees uneasy feelings by purchasing life insurance policies on their employees, as seen in the case of H. H. Holmes.

The issuance of life insurance is subject to several requirements, including the consent of the insured.

Someone cannot buy insurance on your life without you signing off in agreement.

STOLI arrangements are not legal. The National Association of Insurance Commissioners (NAIC) proposed sample legislation in 2007 for states to consider adopting to ban these policies.

Most states have adopted STOLI-related laws, with laws that closely track the NAIC recommendations. Several states also have provisions that can retroactively cancel existing life insurance policies if they are revealed to be STOLIs after the fact.

STOLI arrangements are largely illegal since they do not feature insurable interest between the policy's owner(s) and the insured.

STOLI arrangements are not legal in many states, and most states have adopted laws to ban them. In 2007, the National Association of Insurance Commissioners (NAIC) proposed sample legislation for states to consider adopting.

Several states have provisions that can retroactively cancel existing life insurance policies if they are revealed to be STOLIs after the fact. This is due to a lack of insurable interest.

The NAIC recommendations have been closely tracked by most states in their adoption of STOLI-related laws.

STOLI arrangements are largely illegal. This is because they don't feature insurable interest between the policy's owner(s) and the insured.

Stranger originated life insurance policies are largely illegal since they don't feature insurable interest between the policy's owner(s) and the insured.

The primary reason for this is that in STOLI arrangements, the person holding the insurance policy is financially invested in the death of the insured person, not in their life, health, or well-being.

Many lawmakers have argued that this is unethical, and it's been shown that in some cases, fraud has been discovered in the sale of STOLI policies.

In one case, a California life insurance agent misrepresented a Cleveland woman's financial assets and physical location so he could benefit financially when she died.

This scam would have cost the insurance company millions of dollars, while the agent only paid the woman who was subject to the insurance policy around $8,000 dollars.

The person insured by the STOLI is often a senior citizen or elderly, and they may be compensated for their cooperation with cash.

This has led to concerns that the death of a senior citizen could spark, when a STOLI policy later surfaces and provides death benefits to people who weren't immediately related to or associated with the deceased.

High-pressure sales meetings are a common tactic used by STOLI scammers to sell life insurance policies to seniors. These meetings often take place in upscale settings like fancy restaurants or yachts.

Investors use attractive words like "no-cost" and "risk-free" to lure seniors into buying life insurance policies with the intent to buy them back in a few years. The sales pitches can be convincing, but in the end, it's not the senior's heirs who will receive the death benefit.

Seniors are often promised a significant cash bonus for signing up, but the real winner in this arrangement is an investor with no insurable interest in the senior's life.

An arrangement is essentially a plan or strategy, and in the context of life insurance, it's a way to structure a policy purchase. This can involve multiple parties, including the insured and strangers who buy the policy.

The primary feature of a STOLI arrangement, for instance, is that the insurance policy is purchased entirely as a speculative investment by one or more strangers. This means the policy is not intended to provide financial support for the insured's beneficiaries or loved ones.

In the case of STOLI arrangements, they were sometimes marketed to older individuals under the guise of "zero premium life insurance", "estate maximization plans", or "no cost to the insured plans." These plans were often touted as a way to maximize the insured's estate without any upfront costs.

STOLI arrangements are now considered illegal, with many states enacting laws specifically outlawing the practice. This is a significant change from the past, when these arrangements were sometimes promoted to vulnerable individuals.

Seniors are particularly vulnerable to STOLI scams, as seen in the case of Audrey, a 68-year-old widow who barely makes ends meet on her Social Security.

Audrey's situation is a stark reminder that seniors may not have the financial resources to withstand the loss of premiums paid on an illegal life insurance policy.

A salesperson may use persuasive tactics to convince seniors to invest in life insurance, promising a "risk-free" and "zero commitment" investment.

Seniors may be lured by the promise of a cash bonus, but what they don't realize is that the policy may be voided by the insurance company, leaving them with no refund.

In fact, the insurance company may even consider the senior a "moral hazard" if they discover an illegal contract, which can affect their ability to buy insurance in the future.

This can lead to a situation where seniors like Audrey may find themselves unable to buy life insurance at all, and may end up paying more for property and car insurance.

Here's a breakdown of what can happen when a senior is considered a moral hazard:

It's essential for seniors to be cautious and do their research before investing in life insurance or any other investment opportunity.

A life settlement broker differs from a STOLI scam in that a broker buys your policy and continues making premium payments, while a scammer has no insurable interest in your life and is just waiting for you to pass away.

STOLIs are often considered scams because they involve a stranger buying a policy without any connection to the policy owner, unlike a viatical settlement where the policy owner sells their policy to a third-party.

Viaticals are a type of life settlement where a policy owner sells their policy to investors who pay future premiums and become the sole beneficiary when the policy owner dies.

In a viatical settlement, the policy owner can receive immediate cash, which can be helpful if they have no heirs or are facing a terminal illness.

Life settlement brokers are state-licensed individuals who can buy your whole life policy and give you more cash than the current cash value, often by continuing to make premium payments on your policy.

Investor originated life insurance scams occur when investors invite seniors to high-pressure sales meetings to sell them life insurance with the intent to buy the policies back in a few years.

These sales pitches often take place in upscale settings, like fancy restaurants or yachts, and use attractive words like "no-cost" and "risk-free" to lure seniors into signing up.

The salesperson may promise a significant cash bonus for signing up, but in the end, it's not the senior's heirs who will receive a death benefit, nor will the senior cash in an early life settlement.

The winner in this arrangement is an investor with no insurable interest in the senior's life.

Here are some common tactics used by investor originated scam artists:

These tactics are designed to take advantage of seniors who may be vulnerable to financial scams.