Stranger-originated life insurance (STOLI)
A scheme in which investors have an elderly person take out a life policy so they can buy the benefit right away: a bet on someone else's life that US courts treat as void from the start.
The secondary market for life policies is lawful: an insured person who no longer needs a policy may sell it. STOLI abuses that principle by manufacturing the policy for the investor from the outset. A promoter recruits an elderly person, often through a trust, funds the premiums or promises to, and arranges for the benefit to be transferred to third parties shortly after issue. The requirement of insurable interest, under which the policyholder must have a stake in the insured person staying alive, is sidestepped through a straw buyer. The problem is twofold: the contract becomes a wager that creates an interest in another person's death, and the insurer, which priced on the assumption that some policies would lapse along the way, ends up with policies kept until death by holders who will let none of them go.
In 2011, in PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust, the Delaware Supreme Court held that a policy lacking insurable interest at issue is void from the start, and that the insurer may raise this even after the contestability period has expired. The $9 million policy at issue had been placed in a trust whose beneficial interest an investor bought for $376,111 shortly after issue. The court upheld the right to resell a policy that was taken out in good faith.
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.