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If it walks like a STOLI ... it could be a scam

We are finishing up our discussion of stranger-originated life insurance policies. If history has taught us anything, it is that the idea is fraught with risk -- and not the kind of risk insurance companies like to take on. When we left off, we were going through some of the ways STOLIs can actually harm the seniors involved.

In the case we were discussing in our July 14 post, the broker was charged with grand theft, fraud and a number of other crimes for peddling stranger-owned life insurance policies. Some of the charges stemmed from some irregularities in the application process: The seniors were only completing a portion of their applications; the broker would fill in the rest. The senior may not have done this intentionally, but he or she could still be liable for insurance fraud.

Consider, too, the information asked for on a life insurance application: detailed medical histories of the applicant as well as information about the medical histories of his or her family members. In an era of increasingly urgent warnings about protecting privacy and identity, the seniors are turning over enough information to strangers to make their own financial situations even more precarious. Worse, those strangers are reselling the policies to more strangers. It brings that old shampoo ad to mind: They'll tell two strangers, and they'll tell two strangers, and so on.

Even if a senior is willing to risk all of this, he or she should consider the effect STOLIs could have on life insurance in general. Seniors have a hard enough time qualifying for reasonably priced life insurance policies as it is. If stranger-owned policies become more pervasive, those premiums could go even higher.

Floridians turned to a state-run property insurance company when premiums from private insurers skyrocketed. Then we watched as private insurance companies simply pulled out of the state. If the problem with STOLIs were to get worse, the senior life insurance market in the state could follow a similar path.

The OIR made a compelling case in its 2009 report that STOLIs were not a "victimless crime." The consequences of the practice continuing and becoming more common could be devastating to the individual seniors involved and seniors who are, in fact, strangers to the whole thing.

Source: Florida Office of Insurance Regulation, "Stranger-Originated Life Insurance (“Stoli”) and the Use of Fraudulent Activity to Circumvent the Intent of Florida’s Insurable Interest Law," January 2009

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