Stranger Originated Life Insurance
Whether it be Ponzi schemes, slot machines, or promises from Nigerian princes, the lure of “get-rich-quick schemes” has enticed consumers for generations, as well as motivated crafty entrepreneurs to be ever more creative. No matter how many times we are told “there is no such thing as a free lunch,” consumers are continually drawn to promises of something for nothing. This is where Stranger Originated Life Insurance (STOLI) schemes gain their appeal. Under these schemes, an elderly person is offered a large sum of money, and often a promise of two years of “free life insurance,” in exchange for the “risk free” act of taking out a life insurance policy on his own life and then assigning the right to recover the death payouts to the investor, who will pay all the premiums. The elderly person is paid, the investor makes a profit, and the whole plan seems perfectly harmless and wholly enticing. Despite this innocent exterior, the law determined long ago that such a scheme was void as contrary to public policy, and now, more than a century later, states continue to craft laws aimed at ending evolving attempts to skirt existing prohibitions.
This Comment will highlight the need for targeted legislation that eradicates harmful STOLI transactions but still allows for legitimate insurance sales. First, this Comment will describe the history of STOLI, and how it has evolved from an eighteenth century problem into the complicated scheme it is today. Next, this Comment will discuss the different forms of STOLI and the risks presented by these schemes to the individuals who participate, to insurance companies, and to the insurance secondary market. This Comment will then examine recent case law that addresses STOLI and two model acts that were created to stamp out this scheme. Finally, this Comment will discuss the future of STOLI and new developments in this area. Most importantly, the purpose of this Comment is to demonstrate that states must develop legislation that effectively puts an end to these transactions but at the same time protects consumers’ property rights in their existing insurance policies.