Definition of Foreign Owned Life Insurance (STOLI)

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What is Foreign Owned Life Insurance?

Foreign-Owned Life Insurance (STOLI) is an arrangement in which an investor holds a life insurance policy with no insurable interest on the insured. Without insurable interest, the investor would normally be prohibited from purchasing the original policy. For this reason, STOLI fonts are generally illegal and difficult to obtain.

Key points to remember

  • Foreign-owned life insurance (STOLI) policies are owed by third parties, usually investors, without insurable interest.
  • SOLI policies are often offered in exchange for loans that the insured can use during their lifetime.
  • It could also be used to financially speculate on the lives of others.
  • To get insurance on someone else, you must have an insurable interest in that person.
  • SOLI is illegal because it gives the policyholder, who has no insurable interest or connection with the insured, an advantage in the event of the death of the insured.

How much life insurance do you need?

Understanding Foreign Owned Life Insurance (STOLI)

Life insurance is a financial product that pays a death benefit in the event of the death of the insured. In order to purchase insurance on someone else, you must prove that there is an insurable interest in that person. In other words, the insured and the owner can be different people, but only if the death of the insured will cause financial loss or other hardship to the owner.

Some definitions of insurable interest require that the purchaser and the insured have a romantic relationship, such as that between spouses or parents and children.

Foreign-Owned Life Insurance (STOLI), also known as Investor-Owned Life (IOLI) or Foreign-Owned Life Insurance, is one way to try to circumvent the insurable interest requirement of purchasing life insurance. In other words, to take out insurance on a person whose death would not constitute a valid loss by virtue of an insurable interest.

STOLI arrangements are generally illegal and many schemes include fraudulent financial reporting. For example, an elderly person uses falsely exaggerated financial figures to purchase an inordinately large life insurance policy. In exchange, a third party undertakes to finance the premiums.

Eventually, the original purchaser places the policy in a trust before selling it to the third-party lender for cash payment. The insured receives “free” money. The third-party lender obtains a large life insurance policy that pays a tax-free benefit upon the death of the insured.

STOLI policies are also considered unethical in that they would essentially play into the lives of others.

What constitutes a foreign origin life insurance arrangement?

The main feature of a STOLI arrangement is that the insurance policy is purchased entirely as an investment or speculative instrument by one or more strangers, and not to provide financial support to beneficiaries or relatives of the insured.

STOLI arrangements are illegal today, with many states enacting laws specifically prohibiting the practice. Previously, however, they were sometimes marketed to the elderly under the guise of “zero premium life insurance”, “estate maximization plans” or “no cost for insured plans”.

Viaticums

Note that STOLIs differ from life regulations (viaticals). Under a viaticum, a person who is both the owner and the insured of a life insurance policy agrees to sell his policy to a third party, often a group of investors. Investors in viatical settlement pay all future premiums left on the life insurance policy and become the sole beneficiary of the policy when the insured dies. These arrangements are legal in most US states (but are illegal in Canada) and are often marketed to policy owners with no beneficiaries or who have a terminal illness and could use the money immediately.

Criticism of foreign-owned life insurance

The lack of insurable interest makes STOLI highly unethical. If the policyholder has an insurable interest, it is reasonable to assume that he is hoping for a long life for the insured rather than an accelerated death just to collect the death benefit. Without the insurable interest, the policyholder has more interest in the death of the insured, an event which completes the agreement and benefits the third party.

Having an insurable interest keeps company-owned life insurance (COLI) legal and, for some, ethical. While a COLI policy collects premiums from the employerbeneficiary, the financial value of the employeeinsured to the business gives the employer an interest in the ongoing health and well-being of the insured .

Even a company-owned policy that is widely legal and widely used can make employees uncomfortable. HH Holmes, a 19th century businessman and America’s first known serial killer, took out life insurance policies for his employees before murdering them. This is why the issuance of life insurance is subject to several requirements, including the consent of the insured.

Foreign Life Insurance Arrangements Regulations

STOLI arrangements are not legal. The National Association of Insurance Commissioners (NAIC) in 2007 offered an example of legislation that states might consider adopting (since insurance is regulated state by state in the United States). To date, most states have passed STOLI-related laws, with most states adopting language that closely follows the NAIC recommendations.

Several states also have provisions that can retroactively invalidate existing life insurance policies if they are found to be STOLIs after the fact due to lack of insurable interest.

Special Considerations

A common workaround of the insurable interest requirement is to fabricate it, as in the hypothetical situation above. An investor looking to take out a life insurance policy for a foreigner can instantly generate insurable interest by making a loan to that foreigner. The death of the stranger would leave the loan unpaid, meeting the most skeletal definition of insurable interest.

Although the Internal Revenue Service and state governments have a distaste for STOLI, as well as the growing vigilance of insurance companies, the practice persists.

Is life insurance from abroad legal?

No, STOLI arrangements are largely illegal because they do not involve an insurable interest between the policyholder(s) and the insured.

Can someone buy a life insurance policy on you without your knowledge?

Sometimes, but only if there is an insurable interest. Often, the insured will have to sign the policy application and submit to a medical examination and an authorization to request a file. However, if a parent purchases life insurance on behalf of a minor child, the child does not need to know about the policy, even after turning 18.

Why won’t life insurance pay?

If an insurance policy is found to be fraudulent or the application was filed with deliberate errors or omissions, an insurer may refuse to pay the claim.

For example, if you withhold information that the insured is terminally ill, this may be grounds for not paying the claim upon death. A claim may also be invalidated if there is no insurable interest between the insured and the policy owner.

Finally, an insurer may investigate whether the insured is indeed deceased if there is not enough valid evidence such as an official death certificate provided.

The essential

It is only legal and ethical to take out a life insurance policy on a person with a valid insurable interest. STOLI policies are illegal because they have no insurable interest and are essentially betting on someone else’s life.

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