STOLI life insurance policies issued by outsiders are not legal in the United States. While insurance laws vary from state to state, all states require the owner of a life insurance policy to have Guaranteed benefit in the insured.
This sounds complicated, and like everything else related to insurance, it can be difficult to understand. This unbiased article will teach you everything you need to know about life insurance plans created by strangers, also called “Stranger Owned Life”, “Investor Life Insurance,” or STOLI.
We will discuss:
What is Strangers Originated Life Insurance (STOLI?)
A STOLI policy exists when the owner of a life insurance policy has no real financial interest in the life insured person.
Let’s explain this with two stories. First, we’ll talk about two individuals who started a STOLI arrangement, and details about the insurable interest. Next, we will talk about group sales offers and life settlement arrangements.
STOLI’s story about Peter and Kate
Let’s imagine Peter, an ordinary man. He works in a warehouse, has two children and lives in an apartment. One day, Peter was grocery shopping when a homeless woman called herself Kate approached him. Unfortunately, Kate struggles with Opioid addiction.
Kate needs immediate cash, and suggests Peter take out a life insurance policy for a few hundred dollars.
Peter is intrigued! he do not know Illegal STOLI Policies and immoral. It is believed that Kate’s lifestyle is precarious, and her life may be interrupted by drugs or disease. He imagines himself spending a few hundred dollars today, and some small monthly premiums for a while, for a life insurance policy he might pay soon.
Peter thinks this would be a great investment and a quick way to get tens of thousands of dollars in tax-free income.
Insurance companies are getting ahead of this game
Life insurance companies know this game. When Peter contacts his insurance agent, he cannot prove an insurable benefit. Kate is not a relative, principal employee, business partner, or person Peter would trust to take care of his children if he died.
Their application for life insurance was denied.
Peter tries again. This time, he tells another life insurance company that Kate is his nanny. “There is no one like Kate,” he explains. “If I die, I will have a hard time finding and training a replacement, and that will be costly.”
The insurance company accepts this answer and sends a medical questionnaire to Peter and Kate. But their plan is spoiled again when the insurance company sees Kate’s medical history. She has been hospitalized for overdoses and is receiving other addiction treatments. Wisely, the insurance company refused to cover it.
Peter was disappointed, but lucky. He was not involved in an alien origin life insurance scheme. This is good news, because if Peter is caught, he will face dire consequences, which we will soon explore.
This is why life insurers are so strict about insurable benefits.
What is interest insurance?
Insurance interest is a condition that must be discussed in any life insurance application. In short, the owner of a life insurance policy must have a financial interest in the life of the insured.
Using our story above, Peter has no real insurance interest in Kate. They are strangers. If she died, it would not affect his family in any way.
run out Do They do have an insurance interest in others, though. This could include:
- Biological children and adopted children
- Spouses, and even ex-spouses if they provide financial support or childcare
- business partners
- Key employees in his small company
Insurable interest applies to property insurance as well. For example, you can’t buy a homeowner’s insurance policy on a home you don’t own. You cannot buy an auto insurance policy for your neighbor’s cars. This is not your property, and you will not suffer a financial loss if something happens to them.
Scams and seniors in life insurance originated with investors
Another illegal STOLI practice occurs when older investors call into high-pressure sales meetings to sell them life insurance with the intent of repurchasing the policies within a few years.
These sales presentations usually happen in a high-end venue, such as a fancy restaurant or even on a yacht. Bidders use catchy words like “no cost” and “risk free.” Sometimes the senior is promised a large cash reward for signing up.
But in the end, the heirs of seniors will not receive death benefits, and seniors will not receive financial compensation in an early-life settlement. The winner of this arrangement is an investor who has no insurable interest in your life.
Let’s imagine how this could happen to someone you know.
Audrey suffers from STOLI scam
Audrey is a 68-year-old widow. She hardly earns a living social Security Afternoons are spent at a large local entertainment center and free lunch.
One day, a decent-looking gentleman appears at the seniors’ center and invites everyone to a free lunch at the lobster restaurant across the street tomorrow. He is elegant, well-dressed, and appears trustworthy. He explains to the seniors that he plans to talk about “investments” and life insurance tomorrow. He says it’s “risk-free” and has a “zero commitment”.
Audrey’s friends are excited about their delicious lobster lunch, so they all go. Once seated, the salesperson begins a long sales presentation, complete with handouts, PowerPoint presentations, apps, and more.
The marketing materials are well made, and the agent is soft-spoken. Explain to seniors that they will sign up for life insurance, will get a cash bonus now and maybe a cash bonus in three years when they sell the policy.
Hungry seniors are more likely to sign papers
Hours pass and old people get hungry. A team of salespeople start pressuring them to sign papers and fill out the details so they can feed them. Most seniors succumb to hunger, worry about their medication schedules, and even excited about the cash reward.
In this story, we will assume that 90% of the elderly are subject to stress. They might leave with a belly full and a signature bonus in cash. But it’s the investors who will benefit from the life insurance plan this stranger created.
Are life insurance policies owned by strangers a crime that one is not a victim of?
Although it is illegal, some people may think that foreign-owned life insurance policies are a less victimless crime. After all, the adults get their cash reward and a fancy lunch, and no one gets hurt or loses money, right?
Wrong – wrong – wrong. The problem with STOLIs is that insurers will eventually pay the investor’s life insurance benefits. Do you know who pays this price? Future life insurance policy holders will. If the insurance company pays an extra $20 million in death benefits, you can be sure that the next generation of customers will pay more for their insurance policies.
And remember that many investors can make money from a life insurance policy multiple times over. Once they own it, they can cash it in or sell it to other investors for a profit. The next investor can sell it again. It’s not uncommon for these policies to be sold multiple times before someone like Audrey dies. The investor who holds the policy at that point wins the game.
So yeah, our Audrey got a little cash bonus and a lobster lunch. But investors – people you’ll never meet – are making thousands of dollars over and over betting on her life expectancy. And there are more ways an older person can be financially hurt by STOLIs.
Other Ways to Burn Seniors in Life Insurance Plans Created by Strangers
Legally, life insurance companies can bind a life insurance policy only if there is an insurable interest between the owner and the insured. Thinking about our story about Peter and Kate, above, you know that this is a select group of people.
When a life insurance company discovers an illegal contract, it will invalidate it. They don’t need to return any money to someone like Audrey who might make their own first few years of premium payments (while policy builds cash value).
This is the money Audrey needed to survive, and it would be very difficult to get it back.
Therefore, Audrey suffers the loss of those premiums. But even worse, when other insurers learn of their actions, they can choose not to insure them. they might consider it moral danger: Someone who does the wrong thing when it comes to insurance claims.
- (By the way, our friends Peter and Kate could also be considered moral hazards by insurance companies if they were caught at STOLI.)
Know that all insurance companies invest in massive databases, and share information with each other. Once a life insurance company believes you pose a moral hazard, all other insurance companies will likely insure the same.
Eventually, Audrey may find herself unable to purchase life insurance at all, and may find herself paying more for property and auto insurance.
Now, you’ve heard about people selling life insurance policies themselves, and you’re wondering if that’s a scam as well.
Can you sell a life insurance policy? Settlements of life explained
Life insurance policies build cash value over time, and it takes a few years for the cash value of an insurance policy to be significant.
But this monetary value can be significant in an emergency, and these policies can be sold. Many people buy whole life policies with the intent to cash them out later, perhaps to help fund their retirement or vacation.
life settlement brokers
Life settlement brokers are state licensed individuals who can purchase a life insurance policy, and they will usually give you more than the current cash value. They will continue to pay premiums on your policy or sell it to an investor. This is completely legal.
How is a life settlement broker different from a STOLI scam?
The point of illegal or unethical STOLIs is that a stranger initiates the sale and owns the policy. They have no insured interest in your life, they are only betting on how long it will take for you to die until they can reap the death benefits. T
Why are life insurance policies owned by strangers illegal?
A life insurance policy, regardless of its type, must exist to provide financial protection to an heir or named beneficiary of an insured individual. True, life insurance policies can come with other bells and whistles, such as cash values in life insurance policies or additional accidental death benefits in a life insurance policy.
However, the whole point of any life insurance policy is to provide money to an important person after your death. When people intentionally buy life insurance for someone they don’t know, in the hope that they will die, it is unethical.
How can seniors protect themselves from STOLI scams?
First, know that there is nothing “free” in life, especially when it comes to insurance! Well-dressed, smooth-talking salespeople earn money somewhere, or they won’t serve up a free lobster lunch or spend the afternoon boating.
- Avoid high-pressure sales meetings and luncheons, unless you really have the inner fortitude to say no.
- Take a friend you trust to any free lunch meeting and ask for their advice.
- Eat a good meal early in the day, so you don’t starve at lunchtime.
- Upon arrival, tell the hosts that you are not going to sign anything and see how they will react.
- Do not drink any alcohol at this event.
Also, if you want to put an end to lunch scams targeting seniors, the American Association of Retired Persons (AARP) has Monitoring program “Free lunch” Who always needs volunteers. You’ll attend these kinds of meetings and report back to the AARP about what’s going on. You can also contact National Fraud Hotline for Seniors at 1-833-FRAUD-11/1-833-372-8311 if you see something suspicious.