What
is the difference between a
Life
Settlement and a
STOLI?
A life settlement is
the sale of an existing life insurance policy to a third
party for more than its cash surrender value and less than
its death benefit. A stranger originated life insurance (STOLI) transaction occurs when an
individual applies for a life insurance policy with a prior agreement to cede
control to an investor (the stranger) of that policy
at issuance. AALU, NAIFA and
the ACLI together assert in their STOLI Primer that;
“The crucial
factor is whether all the rules were followed from the
start, including the existence of an insurable interest at
the time the policy is issued.
In a life settlement, the policy was purchased for its
intended use – to protect family members or a small business
from the risk of a premature death. But after the policy is
purchased, something changes in the life of the policy owner
which leads him or her to decide that the policy is no
longer needed. This could be the death of the intended
beneficiary, divorce or the need for immediate cash due to
illness or other loss. In such cases, the policy owner may
decide to sell the policy to a third party.”
We agree and support
this statement but recognize that there are many other circumstances
in which a life settlement may be appropriate. Even the
functioning of the basic economy, or tax legislation, can
lead to the sale of a policy. It is not possible to identify all
the circumstances
that could lead consumers to seek a life settlement after
they own a life insurance policy.
