Which of the following arrangements is prohibited as stranger-originated life insurance under N.Y. Ins. Law §7815?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under N.Y. Ins. Law §7815, stranger-originated life insurance is 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 life of the insured under New York law. No person may directly or indirectly engage in STOLI, and the Department of Financial Services enforces the prohibition. The investor-funded scheme in option A fits the definition exactly: the policy is born for the benefit of a stranger without an insurable interest.
Why the other options are wrong
- B) A settlement by a terminally ill insured of a policy she legitimately owns falls within recognized exceptions to the settlement restrictions, not within the STOLI prohibition.
- C) A trust holding coverage on the grantor's own life, where a clear insurable interest exists, is a lawful estate-planning use, not STOLI.
- D) Selling an existing, legitimately obtained policy through the settlement market is lawful; STOLI targets policies originated for a stranger's benefit at issuance.
Memory hook
STOLI = a policy born bad: no insurable interest at issuance, arranged for the stranger's benefit.