Stranger-Owned Life Insurance: A Risky Concept
The main aim of buying a life insurance policy is to protect one's family or business in the event of death
. Therefore, it makes sense that the beneficiaries have a stake in the life of the insured they are dependant on the insured for financial or business stability, etc. This is called insurable interest, and is the main premise on which life insurance policies are issued.However, there are instances of strangers approaching you to buy life insurance, and then transferring ownership to a third-party (to circumvent the issue of insurable interest). This is called stranger-owned life insurance or STOLI. If you are a senior with considerable assets, you need to be particularly wary of such a proposition. They usually come in attractive, hard-to-resist offers that tempt people to accept.
How does STOLI work?
There are 3 parties involved in a STOLI
The agent or the stranger
The individual who is approached for a policy
A group of investors who buy the policy from the insured after waiting for a couple of years.
Usually the policy amount is quite high, and the insured is offered a large sum of money up front or an opportunity to receive the amount after 2 years. The agent offers non-recourse premium financing. This means that the loan is secured by the policy with no further recourse to the borrower. Essentially, a STOLI amounts to selling one's ability to buy life insurance to a stranger who is willing to speculate on the insured's longevity.
Genuine risks of STOLI
All seniors and those who might be vulnerable to being approached for STOLI deals need to be aware of the risks involved
Insurance companies get suspicious when too much life insurance is applied for. When a huge policy is taken out, the insured may face the risk of being denied additional insurance (one which he genuinely intends for the benefit of his family).
A third party interest in the insured's death: This is a serious risk. If the policy owners are in need of cash (remember STOLI policies are usually taken out for millions), the insured's life could be in danger.
The insured faces the risk of the policy being declared null and void. If the insurance company finds that a policy they sold is not held together by an insurable interest, it can rescind the policy. This means that the investor will forfeit the death benefit on the policy and may sue the insured or the insured's estate for damages.
When a senior receives money from a STOLI transaction he or she is not exempt from taxes because it is not considered an insurance payout in the conventional sense.
It's better to be safe than sorry
Seniors need to be wary of agents who suggest a policy that seems too good to be true. The upfront payments, the interest, and the suggestion of someone else buying out the policy are warning signs that they may be getting into a STOLI deal. Agents make a lot of money on STOLI deals too, so prospective insurance customers need to be very cautious. The money may seem good and tempting, but remember that things can go really bad. Most of all, it is not legal.
If you are a senior and suspect that someone is trying to get you sold on STOLI deal consult an independent, unbiased life insurance practitioner, or even your lawyer. Life insurance is a serious, legitimate way to take care of your beneficiaries and a STOLI might jeopardize their chances of getting a death benefit that was meant to be theirs. A simple term life insurance on the other hand won't cost you a fortune and it is guaranteed to protect your loved ones' interests too.
Stranger-Owned Life Insurance: A Risky Concept
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