New York prohibition of stranger-originated life insurance (Ins. Law 7815)

What New York prohibits

New York Insurance Law section 7815 bans stranger-originated life insurance, usually shortened to STOLI. A STOLI scheme is one where a life insurance policy is created, from the start, for the benefit of someone who has no insurable interest in the insured person's life. The insured is recruited, the policy is issued in their name, and the real beneficiary is an outside investor who is betting on how soon the insured will die.

The statutory definition

Section 7815(a) defines STOLI as any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the insured's life under New York law. The statute names three examples:

1. Stranger financing. Buying the insurance with resources or guarantees from or through a person who could not lawfully have initiated the policy at the time it was initiated. Premium financing from an investor who will end up with the policy is the classic case.
2. Pre-arranged transfer. An arrangement or other agreement to transfer the ownership of the policy, or the policy benefits, to another person.
3. Trust schemes. A trust or similar arrangement used, directly or indirectly, to buy one or more policies for the intended benefit of another person in a way that violates New York's insurable interest laws.

The key words are timing and intent. STOLI is about what was planned at or before issuance. The question is whose benefit the policy was really created for.

What STOLI is not

Section 7815(b) carves out two things:

• Lawful life settlement contracts permitted by Article 78. An owner who bought a policy for genuine reasons, such as family protection, and later sells it to a licensed provider is not engaged in STOLI.
• The practices listed in section 7802(k)(3), which Article 78 excludes from the definition of a life settlement contract.

Both carve-outs have a condition: they apply only if the contract or practice is not for the purpose of evading regulation under Article 78. Calling a pre-planned stranger deal a "settlement" does not make it lawful.

Exam tip: a life settlement sells an existing policy that was bought for legitimate reasons. STOLI creates a policy for a stranger's benefit. The difference is the intent at origination.

The prohibition and the penalty

Section 7815(c) is broad: no person shall directly or indirectly engage in any act, practice or arrangement that constitutes STOLI. That reaches everyone involved, including producers who solicit or place the policy, investors and premium financiers, trustees, and the insured who lends their life to the scheme.

Under section 7815(d), failing to comply is a defined violation under Article 24 of the Insurance Law, which is New York's unfair methods of competition and unfair and deceptive acts and practices article. That puts STOLI participants within the Superintendent's Article 24 enforcement powers. For a licensed producer it also exposes the license to discipline.

Why it matters

Insurable interest exists so that a policy protects someone who would suffer a real loss if the insured died. Under general New York law, a person may insure their own life, and others may insure it only if they have a substantial interest based on love and affection (close family) or a lawful economic interest in the insured's continued life. STOLI gets around that rule by using the insured as a front at issuance. The prohibition protects insureds, particularly older people targeted with "free insurance" offers, and protects the pricing and integrity of life insurance.

Red flags a producer should recognize

• An offer of "free" or "no-cost" insurance to an older client, with premiums paid by a third party.
• A promise of cash or a payment to the insured for agreeing to take out a policy.
• A trust or LLC set up so investors, not family, end up with the benefits.
• An agreement, written or understood, to sell or transfer the policy once it is issued.