New York Child Abuse Identification and Reporting Practice Exam

What is the primary purpose of Stranger-originated life insurance (STOLI)?

1. To provide beneficiaries with security against loss

2. To originate policies for the purpose of resale

3. To ensure a public health benefit through insurance

4. To create investment opportunities for policyholders

The correct answer is: To originate policies for the purpose of resale

Stranger-originated life insurance (STOLI) refers to a practice where life insurance policies are purchased with the intention of reselling them to third-party investors. The primary purpose of this approach is to originate policies specifically for the purpose of resale, thereby allowing investors to profit from the death benefits rather than providing traditional life insurance protection for the insured's dependents. In the context of this practice, it's important to recognize that STOLI arrangements often involve individuals who may not have any personal insurable interest in the life of the insured. This characteristic distinguishes STOLI from conventional life insurance policies, which typically exist to support family financial security or cover debts upon the policyholder's death. The other options present various interpretations of life insurance that do not align with the specific function of STOLI. For instance, while life insurance may generally provide beneficiaries with security against loss or health benefits, that is not the primary intent behind STOLI practices. Similarly, while creating investment opportunities could be a byproduct of how investors approach STOLI policies, the essence of STOLI lies more closely in the intentional origination of policies for resale rather than treatment as a conventional investment vehicle.