The last decade has seen exponential growth in so-called Stranger Originated Life Insurance (STOLI) policies. Under these arrangements, investors approach individuals (often the elderly) to act as figurehead insureds to obtain life insurance. The investors pay the premiums on the policies, which then are “settled” (resold to others). Sometimes the policies are packaged and securitized. For their part, the nominal insureds usually receive some sort of payment.
Insurance companies frown on such arrangements, claiming that the policies violate New York’s “insurable interest” rule.1 This rule—intended to prevent “wagering” or “gambling” on the life of another—requires that the purchaser of the policy face a true loss upon the demise of the insured. Life insurance applications therefore often ask questions to ferret out whether the policy is STOLI in nature (e.g., What is the purpose of this insurance? Who is paying the premiums? Does the insured intend to re-sell the policy?) Life insurance companies, in turn, claim these questions are not always answered truthfully.
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