The Cincinnati Enquirer, 29 March 2008
Posted on LISA website – 31 March 2008

Has anyone offered to write you a life-insurance policy for free?

Believe it or not, this is happening. And the insurance industry, state regulators and federal legislators are very concerned.

First, consider the concept of “insurable interest”. Here, state regulators say that the applicant of a life insurance policy must have a greater interest in the insured’s continuing life than in the potential profit from his ir her death. Family members and business associates typically qualify.

But state law requires this insurable interest only at the policy inception. After the policy is in force, the owner is free to transfer the policy to anyone.

This gives rise to stranger-owned life insurance (STOLI) policies.

Such arrangements, owned by investors, typically include:

Transferring the ownership of a policy to an investor in exchange for an immediate cash payment.

Transferring ownership of a policy in exchange for a portion of the death benefit to be paid to the beneficiary.

Participating in the policy that comes to you “free”.

Buying a policy with the intention of selling it to an investor right away or at some later date.

Watchdogs and legislators are concerned because they see senior citizens being seduced through “free” dinners or cruises into a scheme that often is not in their best interest,

For one thing, once someone owns a policy on your life, he has a financial interest in your early demise.

If he does not have an equally strong, compelling interest in your ongoing existence, you have a problem: The sooner you die, the higher the investment return. He may find a way to bring his investment to an early maturity. The fact that these arrangements are often packaged into blocks that are sold to investors does not make it any more savory.

Most insurance companies try to screen these arrangements out. They fear that these will kill the goose that laid the golden egg. That is, if life insurance devolves into such gambling by investors, Congress will surely withdraw all the tax advantages that make life insurance so attractive.

And reinsurers – insurance companies that insurer and other insurers and, in so doing facilitate the company’s ability to write more insurance – are very concerned about STOLI. They may constrict and, thus, reduce the availability of life insurance altogether.

Michael comments: personally I am not a fan of these policies it seems to me that you are taking a much greater risk in buying a policy that has been newly written as distinct from the older ‘industrial’ type policy where the insured does not have sufficient net income to afford the high level of long term care that these newer insured lives have – because let’s be clear it is not that are being offered ‘STOLI’s’!

Published on 31 Mar 2008 at 02:42 pm