Florida Insurance Commissioner Releases Report on Stranger-Originated Life Insurance, Cautions Senior Consumers
– The Florida Office of Insurance Regulation (Office) today released a report
, “Stranger-Originated Life Insurance and the Use of Fraudulent Activity to Circumvent the Intent of Florida’s Insurable Interest Law,” which closely analyzes the controversial issue of stranger-originated life insurance (STOLI). The Office believes that STOLI transactions are illegal under Florida law; and it has provided legislative language to both the Florida Senate and House seeking support to clarify the current law and better protect consumers.
In its simplest terms, STOLI is a plan to coax or entice someone to apply for a life insurance policy using fraudulent means for the benefit of speculators who seek to profit by purchasing a life insurance policy on a stranger. Most STOLI transactions involve seniors, who can be victimized by participating in these transactions.
“STOLI schemes often rely on misrepresentation, falsification or omission of material facts in the life insurance application,” said Insurance Commissioner Kevin McCarty. “There are undisclosed risks to our seniors who participate in these transactions.”
Three critical ways in which Florida seniors may be adversely impacted include the following:
- Seniors may exhaust their life insurance purchasing capability and not be able to protect their own family or business.
- The incentives, especially cash payments, used to lure seniors to participate in STOLI schemes are taxable as ordinary income.
- If the transaction is rescinded by the insurance company, the senior may be liable to all parties for the costs of the transaction, including commissions (generally quite large) paid by the insurer.
In a traditional life insurance purchase, an “insurable interest” exists between the policyholder and the policy’s named beneficiaries. For example, an individual has an insurable interest in his own life, in that of his spouse, and in that of his business partner.
To the contrary, in a STOLI transaction, there is no insurable interest. Seniors are induced to purchase the life insurance, usually receiving some incentive, often a cash payment for buying the policy. In most cases, the “stranger” even pays the premium for the policy. Under the STOLI agreement, the policy is later “sold” to the stranger, who is paid the proceeds of the policy upon the death of the insured.
STOLIs often are viewed as being similar to viatical settlements; and in many ways they are, except that in a viatical settlement, the policy is initially purchased in good faith. A legitimate insurable interest existed at the time the policy was purchased.
The Office held a public hearing Aug. 28 to solicit comments that served as an important foundation for this report and the legislative suggestions. A copy of the hearing transcript is included with the report.
For a complete look at the Office’s efforts on the STOLI issue, please visit our Web site at: http://www.floir.com/sections/landh/stoli.aspx