When the Insured Dies, Who Benefits From Investor-Origined Life Insurance (Ioli)?

Investor-Owned Life Insurance

IOLI (investor-owned life insurance) is a type of life insurance in which an investor pays a person to purchase a substantial life insurance policy on their behalf. In exchange for the person’s life insurance benefits, the investor pays the person’s premiums.

An IOLI transaction is essentially similar to a STOLI transaction, with the exception that an IOLI is always initiated by a financial institution.

IOLI transactions are the primary source of income for several investment companies. These companies will contact people like Ben and offer him free life insurance for a limited time and a monetary payment in exchange for their life insurance benefits. The corporations will then just wait for Ben and other clients to die before collecting the rewards.

Benefits

It may sound weird for a person to give up his or her life insurance benefits to a complete stranger or investor. So, why would anybody want to enter into a STOLI or IOLI?

It all boils down to the manner in which STOLI and IOLI transactions are carried out. What happens is that an investor or other third party offers to assist a person in obtaining a life insurance policy and paying the premiums in exchange for benefits after the person passes away.

In addition, the individual receives a portion of the life insurance payouts in advance. This allows the individual to make use of his or her life insurance benefits while still alive.

Consider a woman in her seventies. She is in good health, has no debt, and her children have all grown up to be successful adults. She doesn’t have to be concerned about anyone if she passes away.

An investor approaches this person and asks her if she would be willing to give up her life insurance benefits in exchange for a percentage of the benefits upfront. This sounds great to her.

She can use this money to take a dream vacation with her kids and their families. In addition, she doesn’t have to worry about paying the premiums as this is paid for, too.

Lack of Insurable Interest

A problem arises, though. Not just anybody can get a life insurance policy. You have to prove that you have an insurable interest in the event the person dies, which means that you’ll suffer financial loss from this person’s death.

This means that you can’t take out a life insurance policy on an elderly acquaintance just because you expect him to die soon. Also, you can only get life insurance for an amount that would cover the cost of your life.

Criticism of Stranger-Owned Life Insurance

The lack of insurable interest makes STOLI highly unethical. If the policyholder has an insurable interest, it is reasonable to assume that they hope for a long life for the insured rather than an accelerated death just to collect the death benefit.

Without the insurable interest, the policyholder has more interest in the insured’s death, an event that completes the agreement and benefits the third-party.

Having an insurable interest keeps corporate-owned life insurance (COLI) legal and, to some, ethical. While a COLI policy collects premiums from the employer-beneficiary, the financial value of the employee-insured to the company gives the employer interest in the insured’s continued health and well-being.

Even a company-owned policy, broadly legal and widely used, may give employees uneasy feelings. H. H. Holmes, a nineteenth-century businessman and the first noted US serial killer, famously purchased life-insurance policies on his employees before murdering them.

That’s why the issuance of life insurance is subject to several requirements, including the consent of the insured.

Special Considerations

A common workaround for the insurable-interest requirement is to manufacture it, as in the hypothetical situation above. An investor seeking to take out a life insurance policy on a stranger may manufacture insurable interest instantly by granting that stranger a loan.

The stranger’s death would leave the loan unrepaid, fulfilling the most skeletal definition of insurable interest.

Despite the Internal Revenue Service and state governments’ having a distaste for STOLI, as well as insurance companies’ increasing vigilance, the practice persists.

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