Investor originated life insurance, also known as stranger-originated life insurance (STOLI), is a type of life insurance that involves a third-party investor purchasing a life insurance policy on the life of an individual with the intention of selling the policy to investors for a profit. This practice has been gaining popularity in recent years, with some estimates suggesting that STOLI policies account for up to 10% of all life insurance policies sold in the United States.
While STOLI policies may seem like a win-win situation for all parties involved, there are concerns about the ethical and legal implications of this practice. In this article, we will explore who benefits in investor originated life insurance and the potential risks and drawbacks associated with this type of insurance.
Contents
The Parties Involved in STOLI
Before delving into the benefits and drawbacks of STOLI, it is important to understand the different parties involved in this type of insurance. These include:
- The insured individual: This is the person whose life is being insured. They may or may not be aware that their life insurance policy is being sold to investors.
- The investor: This is the third-party who purchases the life insurance policy with the intention of selling it to investors for a profit.
- The policy seller: This is the intermediary who facilitates the sale of the life insurance policy from the insured individual to the investor.
- The investor’s clients: These are the investors who purchase the life insurance policy from the investor.
Benefits for the Insured Individual
One of the main benefits of STOLI for the insured individual is the ability to receive a lump sum payment for their life insurance policy. This can be particularly appealing for individuals who are in need of immediate cash, such as those facing financial difficulties or those who are nearing retirement age.
Read:Which of these is a benefit of fish farming?In addition, STOLI policies are typically sold to individuals who are considered high-risk by traditional life insurance companies. This means that they may have pre-existing health conditions or engage in high-risk activities that make it difficult for them to obtain life insurance through traditional channels. By selling their policy to an investor, these individuals can still receive a payout for their policy, even if they would have been denied coverage by traditional insurers.
Benefits for the Investor
The main benefit for the investor in STOLI is the potential for a high return on investment. Investors typically purchase life insurance policies at a discount and then sell them to their clients at a higher price, pocketing the difference as profit. This can be a lucrative business for investors, especially if they are able to purchase policies from individuals who have a shorter life expectancy.
In addition, STOLI policies are not subject to the same regulations and restrictions as traditional life insurance policies. This means that investors have more flexibility in terms of the types of policies they can purchase and the premiums they can charge their clients.
Benefits for the Policy Seller
The policy seller, also known as the intermediary, plays a crucial role in the STOLI process. They are responsible for finding individuals who are willing to sell their life insurance policies and connecting them with investors. In return, they receive a commission from the investor for each policy sold.
Read:What is one benefit to working collaboratively on a team?For policy sellers, STOLI can be a lucrative business opportunity. They can earn a significant amount of money by facilitating the sale of multiple policies, especially if they are able to negotiate higher premiums from investors.
Benefits for the Investor’s Clients
The final party involved in STOLI is the investor’s clients, who purchase the life insurance policies from the investor. These clients are typically high-net-worth individuals or institutional investors looking for alternative investment opportunities.
For these clients, STOLI policies offer the potential for a high return on investment. They can purchase policies at a discount and receive a payout when the insured individual passes away. However, there are also risks associated with this type of investment, which we will discuss in the next section.
Risks and Drawbacks of STOLI
While STOLI may seem like a win-win situation for all parties involved, there are several risks and drawbacks associated with this type of insurance. These include:
- Legal and ethical concerns: One of the main criticisms of STOLI is that it is often seen as a form of gambling on human life. In some cases, investors may target vulnerable individuals, such as the elderly or those with serious health conditions, and offer them a lump sum payment in exchange for their life insurance policy. This raises ethical concerns about exploiting individuals for financial gain.
- Potential for fraud: There have been cases where STOLI policies have been used for fraudulent purposes. For example, an investor may purchase a policy on the life of an individual who is already terminally ill and then manipulate the insured individual’s health records to make it appear as though they are in good health. This can result in the investor’s clients losing money if the insured individual passes away sooner than expected.
- Uncertainty of returns: While STOLI policies offer the potential for a high return on investment, there is also a significant level of uncertainty involved. The investor’s clients are essentially betting on the life expectancy of the insured individual, which can be difficult to predict. This means that there is a risk of losing money if the insured individual lives longer than expected.
- Impact on traditional life insurance industry: STOLI policies can also have a negative impact on the traditional life insurance industry. By targeting high-risk individuals, investors are essentially cherry-picking the most profitable policies, leaving traditional insurers with a pool of policyholders who are more likely to make a claim. This can result in higher premiums for traditional policyholders.
Case Study: The Viatical Settlement Industry
While STOLI policies are a relatively new phenomenon, the concept of selling life insurance policies for a lump sum payment has been around for decades. In the 1980s, the viatical settlement industry emerged, which involved individuals with terminal illnesses selling their life insurance policies to investors for a lump sum payment.
Read:What is one benefit to working collaboratively on a team?While the viatical settlement industry was initially seen as a way for individuals with terminal illnesses to access much-needed funds for medical expenses, it quickly became a target for fraud and abuse. In some cases, investors would purchase policies on the lives of individuals who were not actually terminally ill, resulting in significant losses for their clients.
As a result, the viatical settlement industry faced increased scrutiny and regulation, and many states passed laws to protect consumers from fraudulent practices. However, the emergence of STOLI policies has raised concerns that similar issues may arise in this industry as well.
Conclusion:
In conclusion, while STOLI policies may offer benefits for all parties involved, there are also significant risks and drawbacks associated with this type of insurance. The ethical and legal concerns surrounding STOLI, as well as the potential for fraud and uncertainty of returns, make it a controversial practice. As with any investment, it is important for individuals to carefully consider the risks and potential consequences before getting involved in STOLI.
Furthermore, the impact of STOLI on the traditional life insurance industry and the potential for fraudulent practices highlight the need for stricter regulations and oversight in this area. As the popularity of STOLI continues to grow, it is important for policymakers and regulators to closely monitor this industry and take action to protect consumers and maintain the integrity of the life insurance market.
