What is stranger originated life insurance?
Stranger originated life insurance is also referred as stranger initiated life insurance. Traditionally in life settlement a person who owns a life insurance policy and finds or feels that he/she no longer requires it and sells the policy to another party in exchange of an amount that is more that the benefit of the policy. Where as in the stranger originated life insurance a third party is involved who has no relation with the policy owner initiates the purchase of the policy by paying the premiums and later buying the policy thereby profiting upon the death of insurer. Such transaction violate the law which is specifically designed to ensure that the person buying the life insurance policy gains benefit out of it and has an economic interest in the continued life and not death.
How does it work?
Stranger originated life insurance have taken a lift and has been spreading very fast among the people and some have taken it as a profession for making money. It works like this:- A investor offers an elderly person a huge amount to buy the life insurance policy at the expense of the investor that is he will pay the premiums on the behalf of the owner of the policy but the owner has to name the investor as the beneficiary of the policy so that the benefit after his death will be claimed by the investor and not by the family members of the policy owner. Such deals are termed as illegal by the government and by the IRS.
Dangers of transaction:
The stranger originated life insurance covers its own pros and cons. We can easily mark the dangers or risks that can be seen while undertaking such transaction. The policy owner or the insured may be liable to the insurance company in the pretext if the investors fails to pay the death benefit premiums, It is also said to be an illegal transaction as it does not benefit the insurer and it family rather benefitting a stranger. If the policy is purchased with the intention to sell it to the investor and not to protect the individuals interest then such transaction will confront a danger to the life insurance industry and also to the insured people. The insurer if sell the policy will be in loss as they wont be able to cover the additional benefit and thus will only be left with the amount in which they have sold the policy which at that point of time is though be huge.
Banning by state:
As claimed by the state that the stranger originated life insurance in illegal thus it is too be banned by the law with immediate enforcement as it is harming the security of the senior citizens of the state and also allowing an illegal business to expand. It prohibits the beneficiary from claiming the benefits of the death benefit of the insurer and also it restricts the insured to claim the additional benefits of the policy. Certain law has been implicated in the life insurance policies by the state such as:
o The sale of the policy will not be allowed till five years from the date of the issuance unless some certain and exceptional circumstances arrive. As the Stranger originated life insurance policy procedure involves the sale of life insurance within the 27 months of the purchase of the policy thus imposition of this 5 year ban has eliminated such programs altogether.
o Any agent or broker who is engaging it in such transaction must purchase an bond of $250,000 and should have an 60days rescission period before the transaction can be made.
o Agents who violate such implications will be criminally prosecuted and will be convicted for a felony.
Such implication and risks involved in the transaction of the Stranger originated life insurance have eliminated the program to an extent and have also maintained the security of the insured people.