A stranger-originated life insurance (STOLI) arrangement is prohibited under California law primarily because:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
In a stranger-originated life insurance arrangement, an investor, lender, or promoter induces an individual — often elderly — to purchase a life policy so that the investor can obtain the death benefit after the policy is later sold through a life settlement. Because the investor has no insurable interest in the insured's life and the transaction is a wagering-style investment, California treats STOLI as a fraudulent practice under its life settlement laws (CIC Sections 10113.1 through 10113.3). A legitimate life settlement is different: the policyowner had an insurable interest when the policy was first taken out.
Why the other options are wrong
- B) Paying proceeds to the insured's estate is not the reason STOLI is illegal; the problem is the investor's absence of insurable interest.
- C) Market capacity is an economic consideration, not the legal basis for prohibiting STOLI.
- D) Missing the buyer's guide deadline is a separate disclosure violation and is not what defines STOLI.
Memory hook
STOLI = a stranger betting on your life — no interest, no deal.