Sleeping With One Eye Open …

Are you worth more dead or alive? The answer to that question may just depend on who you ask and, of course, how you’ve structured your life insurance portfolio.

A recent trend in the life insurance industry has caused a great deal of concern with not only life insurance companies but also with life insurance regulators. Stranger-oriented life insurance, or STOLI for short, are arrangements in which investors purchase a life insurance policy on an individual and collect the death benefit if that person dies while coverage is in force.

Here’s an example of how such an arrangement may work. An investor offers to pay the life insurance premiums on a new policy for Bill. If Bill dies during a pre-determined period (say the first five years of the policy), then Bill’s beneficiaries would receive the death benefit. If Bill is still alive after the 5-year period expires, Bill can either keep the policy by repaying the premiums paid by the investor (along with interest and fees) or he can defer, and the investor assumes ownership of the policy. The investor then becomes the beneficiary and will collect the death benefit if Bill dies while the policy is in force.

There are other common arrangements such as an investor purchasing an existing policy from someone for cash. The investor then becomes the owner and beneficiary immediately upon purchasing the policy. These methods are typically marketed to seniors between the ages of 65 and 85.

While not illegal, STOLI policies are highly discouraged and even disallowed by many life insurance companies. The Ohio Department of Insurance is actively warning residents about the dangers of investor-owned life insurance. In fact, Rep. Jay Hottinger (R-OH) is sponsoring legislation to end such arrangements.

Aside from the legal and ethical arguments for and against, it would seem a little uncomfortable at best, knowing there is someone out there with a vested interest in you dying.