A stranger-oriented life insurance (STOLI) is a policy that is issued as part of a transaction involving issuing the policy on the life of an individual in which they transfer the policy to a stranger. Typically, the new owner is a group of investors, but it can also be one person. Once the policy has been transferred, the owner will continue to pay the premium until the original policyholder passes away. Once that happens, the investor will receive the payout. The people that are most often targets for this type of scam are seniors between the ages of 65 and 85. For older adults to avoid this scam, the most important thing is to stay aware. Let’s take a look at seven ways for seniors to avoid falling for the STOLI scam and what they can do if they already have.
1. Sell Their Policy the Right Way
A senior does not have to go through a STOLI scam to sell their policy. Instead, they can sell it themselves and reap the benefits of its current market value instead of allowing for the STOLI businesses to take all of the profits. Six months before the loan’s maturity date, seniors can consider selling their life insurance policy themselves. The senior’s health typically has to be worse than when they first bought the policy for the policy to be worth anything, as the policy will be worth more on the market if there is a greater chance that the senior will pass away soon.
2. Don’t Sell Their Policy Through a Life Insurance Agent
It is often the case that seniors will get into contact with their life insurance agent to aid them in selling their policy. However, agents are often remarkably ineffective at selling this type of life insurance policy. This could be because some of these insurers are actually in on the STOLI scam or just because they do not know their way around selling a policy. Instead of contacting their life insurance agent, it is recommended that seniors contact a broker who specializes in selling this type of policy.
3. Get Into Contact With the ILIT
The Protector of the Trust (ILIT) can be an extremely useful resource to find a reputable policy broker. Seniors should ask their ILIT for information on reputable policy brokers as there are many illegitimate policy brokers out there that are just as bad as STOLI scammers.
4. Get to Know Their Life Insurance Agent
Seniors do not necessarily need to be friends with their life insurance agent, but they should ensure that they or a family member does a thorough background check. Additionally, the senior should ensure that they can answer several fundamental questions appropriately, such as “do you have your license to sell this type of policy?” and “is this really the best type of policy for me?” Seniors should also look into whether the insurance company is actually licensed by the state to sell life insurance. Lastly, they should double check the insurers answers with their state’s department of insurance.
5. Never Sign Anything Out to Life Insurance Agents
Checks or documents should never be made out to the insurance agents. In many cases, if you are dealing with an unscrupulous life insurer, they may be trying to get away with these STOLI scams independent of their life insurance company. It is much more likely that an agent or broker has gone bad, and not the company that they work for. Signing documents over to the life insurer make it all too easy for them to go under the nose of both you and their company. Instead, all documents should be affirmed by the life insurance agency.
6. Report the Scam
For those who have already fallen victim to the STOLI scam, there are still some steps they can take to salvage the situation. The first step that should be taken after the fact is to report the fraud to the attorney general of the state that the senior resides in. However, this may not prove to be fruitful, as the attorney general’s office may not do anything about it.
7. Consider a Lawsuit
After falling victim to the STOLI scam, the senior can also consider filing for a lawsuit against the particular STOLI business that they were scammed by. They can even sue the life insurance agent that sold them on the ideas of a STOLI. However, for this to work it must be proven that selling the STOLI was based on fraud. Be aware that the statutes of limitation in certain states can prevent seniors from claiming they were a victim of fraud and not of a legal business practice. Also, be aware that if the senior agreed to engage in fraud, such as by the senior’s income being inflated on the life insurance application, this could dig a further hole for the senior.