The Wall Street Journal reported yesterday, that a Federal judge has ruled for Prudential Financial Inc. allowing them to void a $10,000,000 Stranger Owned Life Insurance policy. Surprisingly Prudential is also allowed to keep over $600,000 in premiums. This is huge blow to investors, because many sellers of these products believed that if cases like this were lost, at the very least premiums would be returned, providing them with some expectation of downside risk for the investors.
Stranger Owned Life Insurance is also known as STOLI is when investors purchase life insurance usually on an elderly person. Many states regulate or restrict STOLI and insurance industry associations and experts have also come out against it. They cite various reasons; it violates the intent of insurance to provide protection, possibly creates a market where there might be a lot of fraud, and whenever someone’s death is tied to investors making money there are moral implications to say the least. STOLI policies are often for many millions of dollars, often pay the person being insured, may involve financing of large premiums, the commissions can be hundreds of thousands of dollars, and the insurance companies are not always notified when the application is submitted.
This latest case is another blow against the STOLI industry. Investors, insureds, and their family and advisors should be more cautious than ever, including for-profit and non-profit entities that are sometimes pitched STOLI programs.