Wall Street never runs out of ideas on ways to scam consumers. Let’s see, we have the mortgage loan scam, student loan scam, the auto loan scam, the credit card scam. In the 1980s it was the viatical settlements where life insurance policies for terminally ill AIDS patients were being traded. Then there was a period of time when corporations thought they could take out life insurance policies (COLI – Corporate Owned Life Insurance) on their employees. That did not go so well for Winn-Dixie, Wal-Mart or The Dow Chemical Company. Banks, and this should be no surprise, also got in on the game with BOLIs (Bank Owned Life Insurance). The OCC stepped in and put a kibosh on that.
Now I am learning about the STOLI or in some circles, IOLI. Well, actually, STOLIs slowly began back in 2004 and exploded on the marketplace in 2010. The explosion of the STOLI coincides with the implosion of the real estate market. See the connection? It’s like Wall Street jumped from the fryer into the frying pan. What has happened is that when insurance companies discovered the fraud, they filed lawsuits trying to have the STOLIs declared void ab initio. There are hundreds of lawsuits out there and some are making it to the appellate court level.
What’s a STOLI? A STOLI is a Stranger-Originated Life Insurance policy. IOLI stands for Investor Originated Life Insurance. IOLIs and STOLIs are basically the same product. The scam goes something like this. A broker or agent entices an elderly person to “purchase” a life insurance policy. The broker then sells the life insurance policy to a Wall Street investment company. Generally, the broker will misrepresent the assets of the elderly person in order to earn a larger commission and justify the large policy amount. STOLIs are usually life insurance policies paying out millions. Sound familiar? It is very similar to the scam involving real estate mortgages. Brokers just jack up the assets in order to sell something that appears to be worth more than what it really is worth. By the time the fraud is discovered, the broker has disappeared into the night. In recent years, there has been a huge crackdown on the brokers with brokers being arrested for filing fraudulent life insurance applications. Unlike mortgage fraud, student loan fraud and credit card fraud, attorneys general have cracked down on the middle men. However, the Wall Street investment firms that hungered for the easy money to be made from a STOLI remain unaffected.
What does the elderly person get in return? Well, in short – very little. Brokers usually pay the elderly person a small sum of money for their documentation such as medical records. Additionally, the elderly person is told that for the first 2-3 years they are receiving “free” life insurance because the premiums are usually paid by the investors.
In reality, as everyone is told but somehow no one remembers, nothing in life is free. There are several downsides for the elderly person. First, during the period that the life insurance is in force, the elderly person cannot acquire any other life insurance policies. If the elderly person becomes ill during this period, their chances of ever being able to qualify for a life insurance policy are slim to nill. Second, after that initial 2-3 years, the policy is assigned to an investment firm who then becomes the beneficiary. Third is the potential tax consequence for the elderly person.
Are STOLIs legal? Most states have statutes banning STOLIs known as “insurable interest” statutes. This means that third parties cannot hold life insurance polices because they do not have a vested interest in the insured’s wellbeing. STOLIs, by definition, are gambling with a person’s death. In Lincoln National Life v. Imperial Premium, the Eleventh Circuit of Appeals described the STOLI as “a speculative investment device that entails gambling on the lives of the elderly.” The sicker and older a person is, the more valuable the policy is to Wall Street investors. In the great state of Texas, the no-regulation state, STOLIs are legal as long as the insured (elderly person) signs.
Insiders say that the days of the STOLI are long gone. Today there are life insurance settlements which are heavily regulated. “Trust us”, they say. Bankrate reported in December 5, 2014 that life insurance policy pool that qualifies for settlement is estimated at $170 billion. With all that money coupled with Wall Street’s love of easy money, we’ll see how long life insurance settlements remain legit. Don’t get me wrong, life insurance settlements can be a legitimate way for older Americans to tap into resources in a catastrophic event. However, knowing Wall Street’s penchant for easy money, it’s only a matter of time before some broker figures out a way to tap into those resources in a less than legitimate way.
To get a better picture of just how this fraud was perpetrated, read Lincoln National Life v. Imperial Premium, 11th Cir. (Feb. 26, 2015), and Pruco Life Insurance v. Wells Fargo, et al., 11th Cir. (Feb. 27, 2015).