When it comes to life insurance, it’s crucial to understand the various schemes that could potentially exploit policyholders. One such scheme is Stranger Originated Life Insurance (STOLI), a practice that is not only unethical but also illegal. Understanding what STOLI is and how it works can help you safeguard your financial interests and ensure your life insurance policy is used for its intended purpose—providing security for your beneficiaries.
What Exactly is Stranger Originated Life Insurance (STOLI)?
Stranger Originated Life Insurance, or STOLI, refers to a life insurance policy that is initiated and owned by someone who has no insurable interest in the person insured. Insurable interest exists when the policy owner is likely to suffer a genuine loss or detriment if the insured individual dies. Typically, insurable interest is evident in relationships like those between family members or business partners.
In the case of STOLI, policies are often arranged by a third party who stands to benefit financially from the death of the insured, without any legitimate relationship to them. This third party might pay the insurance premiums and eventually profit from the death benefit, all without the insured person’s family reaping any benefits.
The Mechanics of STOLI
STOLI typically begins when an individual or group (often investors) approaches an elderly person or someone with a high-risk life expectancy and offers them an incentive—such as a lump sum payment—to participate in a life insurance scheme. They cover all premiums with the plan to either sell the policy for profit or collect the death benefit upon the insured’s death.
This type of arrangement violates basic principles of life insurance and is considered illegal because it involves betting on someone’s life without their having a stake in the ongoing relationship. In essence, STOLI policies are treated as wagering contracts, which are against public policy.
Legal Implications and Differences from Legitimate Practices
It’s important to distinguish STOLI from legal life insurance practices such as life settlements. A life settlement involves the legal sale of an existing life insurance policy by the policyowner (who has an insurable interest) to a third party for more than its cash surrender value but less than its net death benefit. Unlike STOLI, life settlements are regulated transactions and provide the policyowner with a lump sum while relieving them of premium payments.
How to Protect Yourself from STOLI Schemes
To protect against STOLI, be cautious of unsolicited offers that involve your existing life insurance or new policies that benefit a stranger.
Be wary of:
- Offers that promise payment for taking out a life insurance policy.
- Schemes that pay for your premiums without any cost to you.
- Proposals that do not require you to prove insurable interest.
- If approached with such offers, it’s advisable to consult with trusted financial advisors or legal counsel to ensure the legitimacy of the proposal.
Reporting and Preventing STOLI Fraud
If you suspect STOLI activity or if someone attempts to involve you in such a scheme, it is crucial to report this to your state insurance department. Regulatory bodies are stringent about investigating and enforcing laws against STOLI due to its potential to harm consumers.
Conclusion
Stranger Originated Life Insurance (STOLI) represents a serious risk within the insurance industry, targeting vulnerable individuals to profit from their deaths. By understanding what STOLI is and recognizing the signs, you can protect yourself and your loved ones from becoming unwitting participants in an illegal scheme. Always ensure that any life insurance transaction is transparent, legal, and beneficial to you and your family, maintaining the primary purpose of life insurance: financial security for your loved ones.
