What is the primary reason why states have outlawed stranger Investor-Originated Life Insurance Stoli transactions?

Table of Contents Show

What is a STOLI Transaction?
How are STOLI Transactions Harmful?
What Consumer Protections Does the Law Provide?
More Information about STOLI and Reporting Fraud
What is "STOLI"?
Back to Top
STOLI Schemes Are Illegal
Investor's Interest in the Death of the Senior
Possibility of Liability on the Part of the Senior or His or Her Estate
Potential Loss of Ability to Purchase Additional Life Insurance
Tax Consequences
How can a senior protect him or herself?
Google™ Translation Disclaimer
Select a Language Below / Seleccione el Idioma Abajo

Many people count on life insurance to provide peace of mind and help ensure their loved ones will be financially secure no matter what the future may bring. Unfortunately, in a scheme called Stranger Originated Life Insurance (STOLI), investors are preying on seniors and misusing life insurance for their own gain.

Legislation supported by the Ohio Department of Insurance protects consumers against these transactions and strengthens the Department’s oversight authority. Amended Substitute House Bill 404 changed the state’s viatical/life settlement laws to restrict STOLI transactions in Ohio.

Seniors need to be aware of these misleading schemes, which are often inaccurately described to consumers as a worthwhile life insurance purchase program.

What is a STOLI Transaction?

People traditionally purchase life insurance to help pay for certain expenses when the insured dies and to leave money for that person’s loved ones to be used for different reasons. In this situation, the beneficiary or beneficiaries have what is called an “insurable interest.”
A viatical or life settlement is a regulated means for someone to sell their existing life insurance policy to an investor. Under Ohio law, the consumer must have purchased the life insurance policy without any intent to sell it at least two to five years before the proposed sale. A consumer should consult with legal counsel or a trusted advisor to determine if their policy is eligible for a life settlement.
STOLI schemes are intended to evade state “insurable interest” laws. Investors, or individuals working on their behalf, initiate STOLI deals so that they can purchase life insurance policies on others. The schemes usually target senior citizens who are expected to live less than four years and who are induced into buying something they otherwise would likely not buy or need.
Generally, the investor “loans” the amount of the premiums for a certain amount of time to or on behalf of the insured. At the end of this period, the insured transfers the policy to the investor in exchange for forgiveness of the loan or after default on the loan. In some cases, the insured also receives a cash payment in connection with the transaction. The investor continues ownership of the policy and then benefits financially – by receiving all of the policy’s death benefits – when the person dies.

How are STOLI Transactions Harmful?

Life insurance has a long tradition of protecting insured individuals and those who have an interest in their lives. STOLI violates that important principle of life insurance practice.
STOLI schemes make life insurance more expensive for Ohio’s consumers. An increasing population of older life insurance buyers changes the risk pool upon which rates are based, eventually resulting in higher rates for all life insurance buyers.
STOLI schemes make it difficult (if not impossible) for seniors who participate in these types of arrangements to buy other life insurance, because they might be deemed “over insured.”
If a deal is completed, there may be adverse tax, insurability or credit issues for the consumer. In addition, if the deal is discovered and voided, the consumer would be a target of an insurance company lawsuit. If the consumer receives cash or loan forgiveness, it could be considered taxable income.

What Consumer Protections Does the Law Provide?

Requires a five-year waiting period instead of two years in certain circumstances before an individual may settle a life insurance policy. The waiting period affects only policies that are originated and funded by investors.
Does not affect the rights of people who purchase life insurance in good faith, including their right to sell the policy if it becomes necessary. Only those who promote the bad faith purchase of life insurance will be stopped.
Ensures that life insurance benefits are paid to those who reasonably expect to benefit from the insured’s continued life, and who suffer a loss from his or her early death.
Requires life settlement brokers and life settlement providers to provide insurers with additional information prior to engaging in a life settlement.
Mandates life insurance companies to ask specific questions in order to identify STOLI transactions and report them to the department.
Gives the department additional oversight authority over life settlement brokers and life settlement providers, which should deter STOLI transactions in the state.

More Information about STOLI and Reporting Fraud

Ohio insurance consumers with questions about viatical/life settlements and STOLI transactions should call the department’s consumer hotline at 1-800-686-1526 or call the fraud hotline at 1-800-686-1527 to report suspicious conduct. Free insurance information can also be obtained at www.insurance.ohio.gov.

If you believe you have been the victim of a deceptive sales practice, we encourage you to contact the enforcement division of the Ohio Department of Insurance immediately:

Complementary Content

${loading}

Date 09/25/11

A PDF version of this document is available for printing.

What is "STOLI"?

Seniors may find themselves being approached by investors or life agents who encourage them to purchase life insurance that will be transferred a couple of years later to an investor. Often these sales pitches occur in a pleasant setting such as nice restaurant, or even on a yacht. The sales pitches can paint a tempting picture: the life insurance purchase itself is characterized as being "free," "risk-free" or "no-cost," and the senior is often promised an up-front cash bonus. These types of schemes are known as "Stranger Originated Life Insurance (STOLI)." The California Insurance Commissioner is also aware of unscrupulous operators pitching "longevity survey" schemes. This is where seniors are paid a sum to fill out a "longevity survey" where their private medical information is divulged to unknown-third parties. The Department of Insurance suspects that the latter are also used to purchase life insurance for investors who wish to wager on the senior's death.

In understanding what constitutes STOLI schemes, it is helpful to understand the concept of a "life settlement." A life settlement is a transfer of an ownership interest in a life insurance policy to a third party for compensation less than the expected death benefit under the policy. The third party then makes any required premium payments and holds the policy until the death of the insured, at which time the third party is paid the death benefit under the policy. Before the death of the insured, the third party may also sell the life insurance policy to another investor, and ultimately the ownership of the life insurance policy may change hands numerous times before the life insurance policy matures. Life settlements can be a favorable option for a senior to access the death benefit of a policy for which he or she no longer has a good economic need to keep in force. A life settlement can pay such an individual more than the surrender value of the policy offered by the insurer, and he or she is relieved of the responsibility of making premium payments. While life settlements thus originated in the context of a sale of a life insurance policy that was originally purchased for all of the traditional reasons (for example, for the protection of "widows and orphans" should the family wage-earner die), STOLI schemes involve investors soliciting the original purchase of the insurance for the sole purpose of an eventual sale to them, which usually occurs two years after the policy is first taken out.

Another important fact to keep in mind is that life settlements are currently regulated by the California Department of Insurance. If a senior wishes to sell his or her policy after purchasing the policy for legitimate reasons, the buyer of the policy must be licensed or authorized by the California Department of Insurance to transact as a life settlement provider. In California, only life settlement providers that are authorized or licensed by the State may conduct the initial life settlement transactions, as they have met certain criteria set forth by the California law. If you are a California resident with a life insurance policy, and someone offers to purchase a policy from you, make sure that the person is licensed as a life settlement provider in California, and is not merely a life insurance agent or unlicensed investor.

(View lists of California licensed or authorized life settlement providers.)

If you are unsure of who you are dealing with, please contact the Department's Consumer Hotline at 1-800-927-HELP (4357) for guidance.

Back to Top

STOLI Schemes Are Illegal

STOLI schemes have been outlawed by the California legislature on October 11, 2009, with the passage of Senate Bill No. 98, codified at California Insurance Code Section 10113 et seq. Under California law, any party purchasing life insurance must have an insurable interest in the person being insured. If there is no insurable interest, the insurer has a basis for declaring the policy void. Simply put, an "insurable interest" exists where the owner of the policy is closely related to the insured, or otherwise has a financial interest in the continued life of the insured. One cannot take out a life insurance policy on a perfect stranger. In addition, California law prohibits executing insurance policies as "wagers" on people's lives. California law regulating life settlement transactions recognizes these risks, and has outlawed STOLI transactions entirely. Not only are STOLI transactions illegal, but as further discussed below, STOLI transactions involve various risks to seniors.

What Are the Risks Associated with STOLI and What Can Seniors Do to Protect Themselves?

Investor's Interest in the Death of the Senior

STOLI transactions involve stranger investors wagering on a senior's death. Once a "stranger" owns a life insurance policy on the life of the senior, that policy typically can be sold or transferred to another investor, and this can occur multiple times. Think about it: do you want just anyone to have a financial interest in your early demise? The potential threat is underscored by the fact that some of these policies pay out in the millions once a senior dies. Even if the "Tony Soprano" scenario does not come to fruition, the insured must be comfortable with giving strangers access to their private medical information, and they will be subject to periodic contacts by the investors for the purpose of checking on the senior's health status. Again, the investors are betting on the senior's death and they'll want to know the status of the "maturity" of their investment.

Possibility of Liability on the Part of the Senior or His or Her Estate

Seniors must be scrupulously careful that there is a legitimate insurable interest in any life insurance policy that is taken out on their lives. If an insurer finds that the policy sold lacked an insurable interest, the insurer can sue to rescind the policy. In such a scenario, it is quite possible that investors would then sue the senior or his or her estate for damages because the life insurance policy they were holding to secure the death benefit (their "investment") would be declared void.

Potential Loss of Ability to Purchase Additional Life Insurance

An individual has only a finite amount of "insurance capacity" on his or her life. Insurers will often decline to write additional insurance if substantial insurance already exists on an insured's life. Thus, once a senior has life insurance taken out on his or her life and then sells the policy, the senior may be unable to obtain more life insurance should a legitimate need for life insurance arise.

Tax Consequences

Seniors may suffer adverse tax consequences from a STOLI transaction. It is also important to keep in mind that life insurance payouts have traditionally enjoyed tax-free protection; this is not true of proceeds from a STOLI transaction.

How can a senior protect him or herself?

It's best to remember the old adage, "if it seems too good to be true, it probably is." Seniors need to be suspicious of slick marketing schemes involving "no-cost" life insurance and entreaties for seniors to "sell their valuable asset of insurance capacity." As we have seen, there are often profound, although hidden costs. Remember, these schemes are typically marketed by agents who stand to make thousands in commissions, for the benefit of investors, who hope to enrich themselves when the senior dies. The purpose of life insurance is to protect your own interests; unless you have a legitimate need for life insurance to protect your dependents, steer clear of schemes involving the purchase of life insurance to be transferred to investors.
If you are not sure whether it could be a STOLI scheme, make sure to secure the independent advice of a trusted professional (for example, your lawyer or financial adviser) of the personal, legal and financial consequences of the purchase of life insurance. Do not simply take the word of those who are trying to profit on your death. You'll want your independent advisor to fully explore whether a clear insurable interest exists in the transaction and whether or not there could be an adverse financial impact from it.
As in all insurance applications, make sure you fill out an application for life insurance truthfully and completely. Misrepresentations on an application for life insurance will give insurers a basis to rescind the policy. Many life insurance applications contain specific questions regarding the reasons for purchasing a life insurance policy, and if anyone encourages you to answer these questions in a false or misleading way, do not take their advice. STOLI marketers prefer that insurers are kept in the dark about a senior's intention to transfer the policy, as this is a tip-off for a STOLI scheme.
In the age of identity theft and social security and Medicare fraud, your personal and medical information can be abused if put in the wrong hands. Never, ever agree to give up private confidential medical information without first consulting with a trusted independent advisor and determining exactly what the party intends to do with the information.
You can also contact the California Department of Insurance for guidance. If you believe that you have encountered an improper STOLI scheme, or wish to discuss an insurance matter, please contact the Department's Consumer Hotline. You may also contact the Hotline at 1-800-927-HELP (4357).

Page 2

Google™ Translation Disclaimer

This Google™ translation feature is provided for informational purposes only.

The Department of Insurance is unable to guarantee the accuracy of this translation and is therefore not liable for any inaccurate information resulting from the translation application tool.

The Department of Insurance is also unable to guarantee the same page layout for all the languages. Depending on the languages, the page layout may look strange from the original.

Please consult with a translator for accuracy if you are relying on the translation or are using this site for official business.

A copy of this disclaimer can also be found on our Disclaimer page.