Stranger originated life insurance (“STOLI”) is a type of insurance arrangement in which a person you don’t know very well (the “stranger”) takes out a policy on your life. It’s a new type of senior scam and STOLI arrangements have become increasingly common over the past decade and almost always target the elderly. Seniors who are approached by someone they don’t know very well who wants to sell them a life insurance policy should be very careful because it could be an exploitation scheme.
How it works. The senior is convinced to purchase a life insurance policy in their own name but agrees to an arrangement where the “investors”, after the expiration of a two-year contestability period, stand to profit from the insured’s death. You have to cooperate by allowing medical records to be released, or by undergoing a medical exam. The senior usually receives an upfront payment and the investors agree to finance the premiums so it doesn’t cost the senior anything to maintain the policy. Alternatively, there’s a promise of cash upon the future sale of the policy or the senior is enticed to enter the arrangement through the promise of two years of free life insurance. The investors typically profit by collecting the death benefits after the senior dies. The sooner the seniors die, the higher the profit.
The risks for seniors. These arrangements ultimately amount to unlawful wagering and have generally been disfavored by courts. While this sounds like an easy way to make some additional income, the investors generally don’t explain the financial repercussions to the senior. They may not be aware the life insurance policies may be far more valuable to them as estate protection rather than as a scheme for making a quick buck. Moreover, seniors participating in STOLI may use up their insurance capacity and be unable to purchase—and unaware of their ability to purchase—life insurance in the future for estate planning and other legitimate needs. If the deal is discovered and voided, the consumer could be a target of an insurance company lawsuit. In addition, any cash received could be considered taxable income.
Nevadans beware. In one case, seniors were encouraged to attend a financial planning seminar and the speaker introduced them to a program called “premium financing”. The Plaintiffs alleged they were under the impression that this type of transaction was legal and that the insurance company would have full knowledge of the arrangement. The U.S. District Court for the District of Nevada in Carton v. B&B Equities Group noted that under Nevada law, a person may not “procure or cause to be procured any insurance contract upon the life or body of another individual unless the benefits under the contract are payable to the person insured or the personal representatives of the person insured, or to a person having, at the time when the contract was made, an insurable interest in the person insured.” NRS 687B.040(1). A party has an insurable interest if they are related closely by blood or law and have a substantial interest engendered by love and affection, or have a lawful and substantial economic interest in having the life, heath or bodily safety of the insured continue. NRS 687B.040(4). The Supreme Court of Nevada has held that a party who pays the insurance premiums on the life of another has no insurable interest in the life of the insured. Waldman v. Maini, 195 P.3d 850, 859-60 (Nev.2008). As a result, the federal Court concluded the STOLI agreement violates the law of Nevada.
How to avoid a STOLI scam. The best way to address a STOLI scam is to avoid getting involved to begin with. Don’t allow someone you don’t know or has no financial interest on you to buy a life insurance policy on you in exchange for a lump sum of money. Don’t sell your current life insurance policy if you feel pressured or rushed. Never lie about your income or worth on your insurance application no matter what incentive someone may be offering you. Don’t forget that the Consumer Services Section of the Nevada Division of Insurance handles all requests for consumer assistance. They can help you understand your policy and answer any questions you might have regarding claims or companies.
Drizin Law is providing this information for educational purposes only. It should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. This information is based on general principles of Nevada law at the time it was created and you should be aware laws frequently change. Moreover, the laws affecting you may differ depending on the circumstances. You should consult with a qualified attorney in your own state or jurisdiction concerning your particular situation. Review of this information does not create an attorney-client relationship.