WSJ: Is Stranger-Originated Life Insurance too good to be true?

A gift horse? The Pasco County, Florida, school district has received an offer to provide its teachers with life insurance at no cost to the district or its employees. According to a May 5, 2014 report in the Wall Street Journal, a group of investors would buy the policies, then split death benefits with the school district and the employees’ designated beneficiaries.

Many states ban this type of arrangement, called stranger-originated life insurance (STOLI). They require the owner of a life insurance policy to have an “insurable interest” in the life of the insured, such as a family or employer relationship. In other words, they should have a greater interest in having the insured be alive than dead.

STOLI differs from viatical or life settlements, in which a chronically or terminally ill insured sells his/her life insurance policy to investors. In exchange for receiving a portion of the policy’s face value, the insured makes the investor the policy’s beneficiary. The beneficiary then receives the death benefit when the insured dies.

Group life insurance remains a very affordable benefit. Many Americans lack adequate life insurance coverage, so employer-sponsored plans play an important role in the financial security of many families. What do you think of STOLI? Submit your comments and let us know your thoughts.

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