Stranger Originated Life Insurance Withstands Challenge

Stranger-originated life insurance (STOLI) is a scheme where someone purchases life insurance on the life of someone that they do not have an insurable interest on. One specific variant of this scheme sees the insured setting up a trust and owning the policy for a period of time while the premiums are paid for by a third-party lender. After a few years, the policy is sold to the lender with a substantial payment to the person on who the insurance was taken out. Now, STOLI arrangements are illegal in most states.

In Wells Fargo Bank v. Pruco Life Insurance Company, the court dealt with a policy that was issued pursuant to a STOLI arrangement. Florida law requires that an insurance company contest a life insurance policy within two years. The particular STOLI policy the court dealt with was contested after the two-year period. Accordingly, the question for the court was whether an illegal policy could nevertheless not be challenged after the two-year window. Ultimately, the court upheld the validity of the law, disallowing the insurance company to contest the policy after the two-year statute of limitations.  

See Jeffrey Skatoff, Stranger Originated Life Insurance Survives Challenge in Florida, Florida Probate Lawyers, September 22, 2016.