Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, November 30, 2009

The Risks and Rewards of Stranger-Owned Life Insurance

Insurance The Nov. 2009 issue of the Illinois Bar Journal contains the following two articles addressing collectively entitled Stranger-Owned Life Insurance: The Risks and Rewards.   

Stephen M. Margolin (shareholder, Chuhak & Tecson, PC) & Valerie J. Freireich (partner, Chuhak & Tecson, PC), The Rewards: A Fictional Case Study, 97 Ill. Bar J. 568 (2009).

James C. Shanley (of counsel, Ungaretti & Harris LLP), The Risks and How to Minimize Them, 97 Ill Bar J. 569 (2009).

The introduction to the both of these articles is below:

Perhaps you've read about it or seen it on TV, or perhaps a client has approached you about it.  The plan works this was: an elderly person lets investors buy insurance on his life in return for a hefty cash payment.  At the end of two years, he can reimburse the investors the premiums they paid-plus interest-and keep the coverage, or he can drop it with no obligations.  And he keeps the cash up-front either way.  

It's called stranger-owned life insurance ("SOLI"), and it's a controversial but increasingly popular financial device.  Do the risks outweigh the rewards?  James C. Shanley is skeptical, Stephen M. Margolin and Valerie J. Freireich more sanguine.  Here are two sides of the SOLI story. 


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Illinois Law (SB 2091 of 2009) references Stranger ORIGINATED Life Insurance, a bad practice. All policies owned by purchasers in the Secondary Markets for Life Insurance are (logically and inevitably) Stranger "Owned". So are Company Owned Life Insurance and Bank Owned Life Insurance in almost every case. NOne of these are improper.
Judging by this summary, the authors of this article are exceedingly sloppy in their terminology in confusing the ownership and origination of Life insurance. NO state in the country ahs passed any law addressing the term "Stranger Owned Life Insurance". Over twenty states have passed laws in recent years to address STOLI and used the word "originated".
I consequently question the competence of these authors to speak to the issues they address.

Posted by: Doug Head | Dec 1, 2009 10:58:45 AM