New Law to Codify Ban on Stranger-Originated Life Insurance Policies and Establish Penalties
Putting an end to stranger-originated life insurance (STOLI) schemes, legislation that would prohibit the practice as well as establish civil penalties of up to $10,000 plus restitution was signed by the Governor on Monday.
The new law (formerly bill A-1263), sponsored by Assembly Democrats Gary Schaer and Gordon Johnson, seeks to prevent the establishment of trusts or other means to initiate or procure policies for investors under the guise of insurable interest.
In New Jersey, life insurance policies can only be taken out by those who stand to suffer financial loss from the death of the individual insured and who have an interest in their continued life – legally understood as insurable interest.
“The tragic loss of life should never be punctuated by a vulturine financial ploy. Life insurance was created to prevent families from becoming destitute after a loss,” said Schaer (D-Bergen, Passaic). “STOLI undermines this intended purpose by rewarding wagers on human life. STOLI policies have led to widespread abuse including the exploitation of the elderly and manipulation of policyholders through early cashouts. Those who suffer because of STOLI policies are the beneficiaries life insurance is meant to protect.”
The legislation followed the 2019 ruling handed down by the New Jersey Supreme Court in Sun Life Assurance v. Wells Fargo, which reaffirmed that STOLI transactions counter standards set forth in existing State law.
Under the new law, any person would be prohibited from directly or indirectly engaging in any act, practice, or arrangement that constitutes stranger-originated life insurance. It further asserts any agreements facilitating STOLI practices are void from the outset.
“We need to stop people from subverting the intent of life insurance policies and prevent those who would fraudulently engage in the purchase of a policy from being able to do so,” said Johnson (D-Bergen). “These practices are harmful and can impact the ability to take out a life insurance policy later when it’s truly needed. It’s only by eliminating the market for such predatory transactions that we strengthen protections for New Jersey residents and families.”