Should Strangers Be Able To Profit From Your Death?

Widow's $56 million lawsuit imperils macabre, profitable insurance practice.
Ever been offered a STOLI? No, we're not talking vodka. We're talking about stranger-originated life insurance, which is basically a way for investors to bet on the death of a person they've never met.

Typically, the person on whom the policy is taken out receives a cash payment in exchange for promising to transfer to an investor he's never met full rights to the survivor's benefits. Then the investor pays the premiums and collects the death benefit when the original purchaser of the policy passes away. If that happens sooner than the life insurer's actuaries predicted it would, the investor stands to gain far more than he's paid out in premiums.


Because the subject of such a policy appears to be behind its creation, the investor can claim they aren't breaking decades-old laws against taking out a life policy on a perfect stranger. STOLI stands on shaky legal ground, and in the last two years 25 state legislatures have enacted anti-STOLI laws. Another 14 are considering following suit. "Life insurance is intended for protection," says Steven Brostoff, spokesman for the American Council of Life Insurers. "It's not intended to be a vehicle for speculators to wager on human life."

Brostoff says that when the time comes to pay out on policies that appear to be STOLIs, it's common for a deceased's family members to challenge in court an investor's right to claim the benefit.

That's what Alice Kramer of Stamford, Conn., the widow of a prominent New York City attorney, is doing. In play: $56 million in benefits that accrued upon the death of her husband. Last week a federal judge in Manhattan ruled Kramer's case could go forward, a decision that could become a precedent for similar cases around the country.

The reason plaintiffs like Kramer have legal grounds to challenge STOLI policies is that all U.S. states have "insurable interest" laws in effect for life insurance policies. These generally state that the only people who can take out or hold an insurance policy on the life of another person are blood or legal relatives or those with a financial interest in the survival of the policy's subject. That would appear to run counter to STOLI investors, who have a financial interest in the policyholder's passing on as quickly as possible.

via forbes