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LIFE INSURANCE LITIGATION
Stranger originated life insurance policies: life insurance policies that are owned by someone without an insurable interest in the life of the insured.Also referred to as “zero premium life insurance” “estate maximization plans” “no cost to the insured plans” “new issue life settlements” “high net worth settlements” “non recourse premium transactions” “Spin-Life”.US state laws generally require the owner of life insurance policy to have an insurable interest in the life of the insured. STOLI arrangements circumvent that requirement, and they were declared illegal on July 1, 2010.
Stranger-Owned Life Insurance (STOLI) is one of the less savory back-alleys of the Life Settlement marketplace. “Enterprising” insurance salespeople have used a combination of blandishments and material inducements to convince select high-net-worth seniors to “leverage their insurability” for financial gain.
The pitch most often goes something like this - “We’ll acquire a $xyz million Life Insurance policy on you. It won’t cost you a dime out of pocket, since we’ll use a non-recourse (or even, more recently a recourse) loan to finance the premiums. You’ll have “free” insurance for a couple of years, and after the two-year contestability period is up, we’ll sell your policy in the secondary market for a lot more than you’ve put into it!”
It doesn’t take much imagination to see the myriad ways an arrangement of this type can go wrong for the insured. Both State regulators and insurance companies themselves are predisposed toward viewing such transactions as fraudulent. In addition, at the same time that numerous economic and environmental factors have led to an increased number of policies entering the secondary marketplace, the investment capital available to many of the traditional institutional buyers has dried up.
The result is significant downward pressure on the market price of many policies, leaving the highly leveraged premium-financed policyholder “upside-down” when they attempt to sell their policies. Importantly, STOLI must be distinguished from legitimate premium-financing arrangements. There are any number of good reasons a client might wish to utilize OPM (other people’s money) to pay their life insurance premiums. However, entering into such a financing arrangement with the intent to divest oneself of the policy in a relatively short period of time in hopes of a financial windfall is not one of those reasons.
This recap of the Ohio National Life Assurance Corporation v. Douglas Davis et. al.illuminates many of the issues with stranger owned life insurance.