19 Jun 2017

You May Want To Think Twice Before You STOLI

By John P. Seneczko

Traditionally, when people buy life insurance, they’re doing it to protect those they love from financial insecurity, in the event that something happens to them.  The responsibility of the insurance company in that case is to protect both the insured and the individual(s) who have a sincere interest in their lives. The concept of Stranger Owned Life Insurance (STOLI) is in direct opposition to the core purpose of our industry.

What Is STOLI?

STOLI schemes involve the purchase of a life insurance policy by a third party that has no insurable interest in the policyholder. In other words, imagine a scenario in which someone may be asked by an individual or organization to purchase a life insurance policy that they may not have bought otherwise, specifically so that they can turn around and sell it to the third party.

The third party will likely offer an upfront payment (much less than the face amount of the coverage) in exchange for ownership of the policy, and for being named as its beneficiary.

In this way, the third party actually generates a profit when the insured dies.

STOLI: Not To Be Confused With Life Settlements

On the surface, it would be easy to confuse a STOLI scheme with what is known in the industry as a Life Settlement. After all, they both involve the purchase of a life insurance policy by a third party. That, however, is where the similarity ends.

Life Settlements can be a valid option for a policyholder whose needs have significantly evolved since they originally purchased their coverage. This is especially likely if the policy was purchased a decade or more ago. In today’s world a lot can happen in 10 minutes, never mind 10 years…

Under those circumstances, Life Settlement companies (LSC) will offer to purchase the policy at a price that is less than the death benefit but more than the cash surrender value.  This can be helpful for the policyholder provided there is full disclosure and they give informed consent.

What’s The Downside of STOLI?

STOLI schemes have a number of consequences, including but not limited to the fact that they can make it more difficult for the sellers to obtain life insurance coverage that they actually need because insurance companies view them as being “over insured.”  Furthermore, consumers, who sell their policies, may also face adverse tax and credit challenges.

Another side effect of STOLI is that it most often targets senior citizens, aged 65 or older. This is part of a much larger trend that shows that the elderly, as well as people living with disabilities, are often the most vulnerable to financial exploitation. They are often thought to be more trusting and less financially sophisticated, which makes them the preferred targets of individuals intending to commit some form of financial abuse.

How To Guard Against STOLI

Insurance regulators and insurance companies are doing their part to tighten the legislative loopholes that allow for STOLI schemes, and to educate financial advisors about the practice and its dangers.

There are also steps that consumers can take:

• Solid financial planning - in many instances people resort to selling their life insurance policy as a way to resolve other financial challenges that they may have. A solid financial plan that is carefully built around your evolving needs will help to mitigate the odds of finding yourself in those circumstances
• Be alert to signs that you or someone close to you – particularly elderly friends and family – is being targeted for any type of fraud or financial exploitation. You can learn more about those signs here.