Key Points in This Section
- Both sellers (viators) and buyers (settlement companies) have engaged in fraudulent practices in the secondary life insurance market
- Seller fraud includes misrepresentation of health status and selling policies on lives the seller does not actually insure
- Buyer fraud includes failure to pay, fraudulent inducement, and investing in policies under the guise of charitable programs
- Stranger-Originated Life Insurance (STOLI) involves purchasing a policy for the primary purpose of immediately selling it — circumventing insurable interest laws and is now illegal in most states
- The NAIC revised its Viatical Settlements Model Act in 2007 to impose a 5-year settlement ban on policies showing STOLI characteristics, with exceptions for genuine life changes
- The Mutual Benefits Corporation case remains the most prominent example of large-scale viatical fraud, resulting in criminal convictions and losses to approximately 28,000 investors
Uses and Abuses
Like any financial market, the secondary market for life insurance has been susceptible to fraud and abuse — from both sides of the transaction. Understanding these abuses is important both for regulatory compliance and for protecting clients who may be considering a settlement.
Seller Fraud
Fraudulent practices by sellers (viators) have included:
- Misrepresenting health status — claiming to be more seriously ill than actually the case to inflate the settlement offer
- Selling policies on lives of individuals the seller does not actually insure — fabricating the underlying insured
- Collecting settlement proceeds on a policy and then continuing to pay premiums — attempting to collect both the settlement and the death benefit
- Forging signatures on policy ownership or beneficiary change documents
- Selling fractional interests in the same policy to multiple investors without disclosure
- Failing to pay agreed settlement amounts to viators after taking ownership of policies
- Using high-pressure tactics to purchase policies for unfairly low amounts from terminally ill or elderly individuals
- Soliciting investment funds from the public for viatical portfolios without proper securities registration
- Using charitable organization structures to attract investor funds while misappropriating proceeds
- Misrepresenting life expectancy projections to investors to inflate expected returns
The most prominent fraud case in the viatical settlement industry involved Mutual Benefits Corporation (MBC), a Florida company headed by Peter Lombardi and Joel Steinger. MBC purchased life insurance policies from people with HIV and other serious illnesses and sold fractional interests in those policies to approximately 28,000 investors, raising over $1 billion. The company inflated life expectancy estimates to make the investments appear more attractive and misappropriated investor funds. The SEC obtained a court order freezing MBC’s assets in 2004, and criminal convictions followed. The case prompted Florida and other states to significantly strengthen their viatical settlement regulations.
Stranger-Originated Life Insurance (STOLI)
What is STOLI? Stranger-Originated Life Insurance (STOLI) — also called Stranger-Owned Life Insurance (SOLI) or Investor-Originated Life Insurance (IOLI) — refers to any arrangement at or prior to policy issuance designed to initiate or facilitate the issuance of a life insurance policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured.
In a STOLI arrangement, investors — typically strangers to the insured — induce an older individual (usually age 65–85) to apply for a large life insurance policy. The investors pay the premiums during the contestability period, after which the policy is assigned to them. The arrangement effectively converts life insurance into a speculative investment vehicle, circumventing state insurable interest laws.
Common STOLI marketing tactics include:
- Offers of “free” or “no-cost” life insurance
- “Estate maximization plans” or “zero premium” arrangements
- Premium financing with the understanding that the policy will be transferred after the contestability period
- “New issue life settlements” or “non-recourse premium finance transactions”
STOLI — Legal Status and Regulatory Response
STOLI arrangements are illegal in most states. They violate the fundamental insurable interest requirement of state insurance law, which exists to prevent life insurance from becoming a vehicle for wagering on human lives.
The regulatory response has developed along two tracks:
NAIC Model Act (2007): The NAIC revised its Viatical Settlements Model Act in 2007 to address STOLI directly. The revised model imposes a 5-year ban on settling policies that exhibit indicators of a STOLI transaction. However, the ban includes broad exceptions for genuine life changes that legitimately alter a policyowner’s insurance needs, including:
- Terminal or chronic illness of the viator or insured
- Death of the viator’s spouse
- Divorce
- Retirement from full-time employment
- Physician-certified disability preventing full-time employment
- Bankruptcy or financial insolvency
NCOIL Model Act (2007): The National Conference of Insurance Legislators adopted its own Life Settlements Model Act in November 2007. The NCOIL model expressly bans STOLI transactions, imposes reporting requirements to help regulators identify STOLI activity, and prohibits inducing anyone to purchase a policy for the sole purpose of entering into a life settlement.
Impact on Legitimate Settlement Transactions
The prevalence of abuses — particularly STOLI — created reputational damage for the entire secondary market and prompted insurers to become more aggressive in contesting policies they suspected were initiated for settlement purposes. It also led to more rigorous underwriting practices and, in some cases, made it harder for legitimate viators to find willing settlement companies.
As the regulatory framework has matured, the legitimate life settlement market has continued to grow and is now well-established as a consumer protection tool. The industry’s self-regulatory efforts — covered in Chapter 4, Page 3 — have also helped distinguish ethical market participants from bad actors.