A New York and New Jersey Lawyer Who Represents Policyholders and Beneficiaries in Life Insurance Denial Cases

I read an article about STOLI policies that provides an interesting perspective on the secondary life insurance market.

To the uninitiated, Stranger Originated Life Insurance (STOLI) policies are those where investors approach people (usually the elderly) to purchase life insurance policies. The investors pay the insured a sum of money to take ownership of the policy and either keep it or sell it to others. The end result is that a person or entity without an insurable interest in the insured pays the premiums and becomes the beneficiary. A variation on this is when investors simply purchase an existing policy from an insured.

This is essentially a form of investing in, or wagering on, the life and death of a person. I have written that it is a shady practice because it devalues human life. Don Corleone famously said about the sale of drugs that, “It’s a dirty business.” Well, it’s not a stretch to say that the same applies to STOLI policies.

I still believe this, but my perspective has opened up a little. An article in Tallahassee.com got me thinking about these arrangements in a different way.

It points out how a life insurance company voided a policy after the death of the insured simply because it claimed that he had entertained the idea of selling the policy, even though he never actually sold it. This, of course, did not stop the insurance company from pocketing premiums for two-and-a-half years.

The article explains that being able to sell a life insurance policy on the open market may not be a bad thing, after all. What if a terminally ill person cannot afford to pay premiums? Or what if a parent obtains a policy to protect his or her children and years later that same need no longer exists? Should the policy terminate with the insurance company gaining a windfall?

Life insurance companies actually count on earning money from premium payments for policies that will never pay out. Did you know that? But if you have paid premiums year after year, and no longer can afford to do so, or no longer need coverage, why should the money you have paid go into the insurer’s pockets with no return to you? Florida law allows an insured to sell a life insurance policy after it has been in existence for two years. Because the secondary market puts money in insured’s pockets, and ultimately takes it out of the insurance company’s bottom line, they rail against it.

I think the Florida law makes sense. It protects insureds who are in financial need and provides more financial and estate planning options. But I remain cynical about true STOLI policies that are procured with the intent of selling them directly to investors.

While these types of STOLI policies can be useful to people who need money, and the financial arrangement is really no different for the insurance company than if the insured intended to keep the policy–in either case, the insurance company collects premiums and pays a benefit upon the insured’s death–they do tend to devalue human life. I’ve not yet heard of an insured for a STOLI policy being knocked off, but if it happened, would it really be a surprise?


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