Stranger-Originated Life Insurance (STOLI) policies may be the new mortgage-related investment debacle of the year, creating havoc for unsuspecting investors and a financial bonanza for brokers and insurance agents who unload them.
Stranger-Originated Life Insurance policies, also known as stranger-initiated life insurance or STOLI for short, are controversial investment arrangements in which a stranger initiates an insurance policy against someone’s life and then resells the policy to an investor. The investor pays the premiums and collects the proceeds when the original owner of the STOLI dies.
The middleman in the process is a broker or insurance agent. And, in recent months, regulators have been cracking down on both. Sales agents in Florida, Ohio, Minnesota and California all have been arrested and/or had their professional licenses revoked for allegedly exaggerating the wealth of an elderly client to take out a STOLI policy and then selling the policy to an investor.
One STOLI sales agent who specialized in stranger-originated life insurance policies is Steven Brasner. As reported June 22 by the Wall Street Journal, before the financial crisis hit, Brasner connected untold numbers of aging retirees in need of money with hedge funds looking for STOLI investments.
Today, many of those policies are worthless. In April, Brasner was arrested by Florida authorities on 22 counts of alleged grand theft, fraud and other offenses tied to $78 million of policies that earned him nearly $2 million in commissions. According to the Florida Attorney General, Branser lied to insurers about applicants’ financial status and their reasons for buying the coverage.
Brasner also faces a number of civil suits filed by insurers trying to void many of the policies, as well as lawsuits by investors who allege they lost money buying their now-worthless policies.
In March, Ohio regulators revoked the license of an agent who allegedly promised a 74-year-old Cleveland woman $8,000 to let him take out $9 million of insurance on her life. According to the Wall Street Journal, the application to Prudential Financial listed her net worth at $12.5 million. In reality, she and her husband had a net worth of $2,000 and combined monthly income of $950, according to Ohio officials and Prudential.
A similar scenario played out in Minnesota where regulators penalized an agent who had secured 44 policies totaling $127.8 million on the life of one man. The agent’s license ultimately was revoked, and he had to pay a $250,000 fine. According to regulators, the agent misrepresented the total amount of insurance outstanding as his client applied for additional coverage over a several year period.
Allegations of wrongdoing by agents and brokers are common in more than 200 civil lawsuits filed by insurers around the United States involving alleged stranger-originated policies, according to the Wall Street Journal article.