The concept of insurable interest does not come up often in day-to-day discourse. Even for the Florida Office of Insurance Regulation, it must be rare to sit in meetings devoted to questions of insurable interest. A few years ago, however, that was not the case. The subject came up when the OIR launched an investigation into stranger-oriented life insurance schemes, or STOLIs.
Benefits from a life insurance policy are tax exempt, and, of course, the payouts can be significant. As we have said, that’s where insurable interest comes in: A person must have an actual interest in the insured’s continued health and well-being to take out a life insurance policy on that person. If there were no insurable interest rule, life insurance would quickly turn into a gambling scheme.
The OIR had researched STOLIs, gathering information from a number of sources, and published a report on its findings in 2009. Officials were troubled by scams run on senior citizens, scams that put the seniors at financial risk and lined the pockets of unscrupulous agents and brokers.
The report identified several consequences of STOLI schemes. Seniors could “exhaust their life insurance purchasing capability,” for one. In lay terms, the OIR means that seniors could spend so much money on the stranger-owned policies that he or she could not purchase policies that would benefit family members. Also, insurance companies will only write so many policies for one person — the insured could actually be precluded from purchasing coverage that would benefit anyone other than investors.
What some seniors may not realize, too, is that those payments offered for their participation in STOLI schemes qualify as taxable income. There can also be tax consequences for selling the life insurance policy.
We will finish this up in our next post.
Source: Wall Street Journal, “Regulators Rein In Murky Life Policies,” Leslie Scism, June 21, 2010Florida 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 2009Share