Stranger Oriented Life Insurance Policies Author: Piah    Posted under: Life InsuranceLife Insurance questions answered


One of the most important things that you need to secure in your future is to have a life insurance policy.  This way, in the event that you die, a lump sum will be given to your beneficiaries as a way of helping them cope with the loss.  However, some individuals and even insurance companies found this to be a leverage to spin off scams to elderly individuals so that they can be the ones to cash in.

Technically, any individual who is a not a relative of the policyholder cannot purchase a life insurance plan on their behalf.   Federal law enacted on 1945 gave free hand to the states to regulate their own laws regarding insurance policies.  In most states, the one purchasing the insurance should demonstrate that s/he has a dependency on the one being insured.  This is otherwise known as “insurable interest.”* The dependencies may mean education or debt, as it may apply.

Stranger-Oriented Life Insurance Policies (STOLI) refers to the sale of a life insurance policy to a third party. ** The owner then, decides to sell the policy for cash, while the buyer becomes the owner of the policy.  This means that they get to pay future premiums, and wait for the payout when the insured dies.  STOLI is known to be rampant in the states of Arizona and Florida and the victims are elderly individuals. They are hurt in several ways by this scheme, in that they may lose the ability to purchase another insurance policy, should they decide to do so again.  The act of selling an insurance policy is one of the violations that an insurance company abides by, and this will put the senior in a difficult position.  The insurance company can even sue you for this.  Moreover, the money that the senior receives from this transaction is also considered taxable: it’s either you pay taxes, and expose the scam, or not pay taxes, and be indicted for tax evasion.

Specifically, companies estimate how much an elderly person has to live before investing their money on the individual.  Based on the estimate, the company now decides to buy a life insurance policy, and sells fractional shares to investors, who will now collect the sum when this person dies.  However, problems start when the estimated life expectancy of the senior turns out to be longer than they betted on.  This is where the disappointment on the investors starts to happen.  Life expectancy is a major factor in this gamble.  If their estimate is too low, they are now jeopardized in two ways: they need to pay the premium for as long as the policyholder is still alive, and the payout is also delayed.

People think that people investing in another person’s life is a very distasteful business to be in.  The idea that you are waiting for someone to die so you can cash out on their policy is basically inhuman.  Some have even commented that what if the lump sum that the investors will be receiving will be a considerable amount of money, and they become impatient enough to wait for the time for payout- will that be reason enough for them to take action?

Sources:
http://www.slate.com/id/2189278/
** http://insurance.mo.gov/consumer/Life-Annuities/STOLI.htm
http://online.wsj.com/article/SB10001424052748704694004576019344291967866.html?mod=wsjcrmain#printMode
http://thelifeinsurancelawyer.com/
http://www.mainstreet.com/article/moneyinvesting/insurance/3-popular-life-insurance-scams?page=2

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