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  • UPDATE: Stranger originated life insurance is illegal
  • January 14, 2015
  • UPDATE: Stranger originated life insurance is illegalBy Karla Sullivan

    There is no reasonable circumstance that would justify an insurance company issuing an annuity to someone who is terminally ill or in severely poor health according to LISA, the Life Insurance Settlement Association.

    But this is a trending scheme for insurance fraud. Agents involved in these schemes will seek terminally ill individuals to sell an annuity for a value so small it is worth the consideration for many. Still, this amount is subject to growth and can provide the agent with profit at the time of the policyholder’s death.

    Stranger Originated Life Insurance has become a a transaction that is illegal and unfair to uninformed senior consumers and damage the reputation of the life settlement industry. It is the initiation of a life insurance policy for the benefit of a person who, at the time of the creation, has no insurable interest in the insured. This is not a life settlement.

    Investors, working through life insurance agents, induce seniors to provide their names for a fraudulent purchase of a life insurance policy. The seniors immediately agree to give control of  the policy over to the investors. Although investors have control of the policy from the beginning, legal ownership of the policy usually occurs after the two year contestability period, but the change can occur earlier. Lies or misstatements could create numerous litigation issues for seniors beyond the risk of losing their investment in the end.

    Seniors engaging in a scheme generally receive some financial inducement at the beginning of the transaction or when the policy is sold, but giving the investor total control over the policy. Investors can profit by collecting the death benefit after the senior dies.

    State fraud campaigns and insurance companies are working hard to safeguard against these practices. For example, Genworth Financial offers tips to protect you from fraud protection and how to avoid litigation while MetLife provides general procedures to communicate with its Corporate Ethics and Compliance Department as well as provide a compliance/fraud hotline for more information concerning codes of conduct.

    Many states, like Illinois, send out warnings and press releases stating that stranger originated life insurance is illegal.

    “Stranger-originated life insurance arrangements or STOLI transactions are illegal in Illinois,” Director Boron said. “If you or a loved one are asked to buy a life insurance policy and then sell it immediately as a viatical settlement, you should know the activity may be considered fraudulent and the individuals involved may be prosecuted.”

    DOI’s warning about the dangers of STOLIs comes after the department became aware of several STOLI cases being reviewed in Illinois. “Purchasers” of so called STOLI transactions can face charges including breach of contract and fraud. State insurance regulators also warn that the participants themselves may be liable for committing insurance fraud or misrepresentation.

    Individuals considering a viatical or accelerated death benefit should consult an accountant and tax adviser to avoid devastating tax and other financial cons. Talk to a trusted attorney that can help make the best decisions before being involved in any investment decisions.

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