What Is Investor Originated Life Insurance?

Investor Originated Life Insurance (IOLI) refers to a life insurance policy acquired by a third-party investor who lacks a traditional insurable interest in the life of the insured individual. This arrangement diverges significantly from conventional life insurance, where the policyholder typically holds a legitimate financial or emotional stake in the insured’s continued life, such as a family member or business partner. IOLI attempts to create an investment opportunity through the death benefit, rather than providing financial protection to those who would suffer a loss from the insured’s passing.

Defining Investor Originated Life Insurance

Investor Originated Life Insurance, often synonymous with Stranger-Originated Life Insurance (STOLI), involves an investor initiating and funding a life insurance policy on an individual with whom they share no direct relationship or traditional insurable interest. The investor typically assumes the role of policyholder and beneficiary, paying all premiums. Their primary objective is to gain from the death benefit upon the insured’s death.

The key participants in an IOLI arrangement include the insured, the investor, and the insurance carrier. The insured is the person whose life is covered. The investor acquires, owns, and funds the policy, ultimately receiving the death benefit. The insurance carrier issues the policy.

From an investor’s standpoint, the motivation behind an IOLI is speculative, aiming to profit from the death benefit. This contrasts sharply with the traditional purposes of life insurance, which typically include estate planning, income replacement for dependents, or wealth transfer for the insured’s family or business. IOLI arrangements are designed as an investment vehicle, focusing solely on the financial return upon the insured event.

Structuring IOLI Policies

The origination process for IOLI policies often involves investors identifying potential insureds through third-party facilitators or brokers. These facilitators might approach individuals, often seniors, offering financial incentives or “no-cost” insurance plans in exchange for participating in such an arrangement. The general steps usually involve the insured applying for a large life insurance policy, which is then intended for transfer to the investor.

The funding mechanisms for IOLI policies typically involve the investor directly paying the premiums. In some instances, the arrangement might initially involve loans to the insured to cover premiums, with the understanding that the policy will be quickly transferred to the investor. The investor ultimately owns the policy and is designated as the primary beneficiary.

Third-party facilitators, including brokers and agents, play a significant role in connecting investors with individuals willing to be insured for IOLI purposes. These intermediaries often market the policies under various names, such as “zero premium life insurance” or “estate maximization plans,” obscuring their true nature. This highlights the complex and often indirect pathways through which IOLI policies are established.

It is important to differentiate IOLI from legitimate life settlements. In a life settlement, an existing policyholder sells their already-owned life insurance policy to a third party for a cash sum greater than the policy’s cash surrender value but less than the death benefit. IOLI, conversely, involves the origination of a new life insurance policy specifically for an investor who has no pre-existing relationship with the insured, making it distinct from the sale of a policy already in force for its intended purpose.

Insurable Interest and Related Concerns

The concept of “insurable interest” is fundamental to life insurance, requiring that the policyholder would suffer a legitimate financial or emotional loss if the insured individual were to die. Examples of traditional insurable interest include spouses, dependent children, or business partners, all of whom would experience financial hardship upon the insured’s passing. This principle ensures that life insurance policies are taken out for protection against loss rather than for speculative or unethical purposes.

Insurable interest is required at the time a life insurance policy is originated to prevent speculative wagering on human life and to mitigate moral hazard. Without this requirement, individuals could potentially profit from the death of strangers, creating a perverse incentive. The rule helps to decrease the financial motivation for a speculator to hasten an insured’s death to collect a death benefit.

IOLI arrangements directly challenge this fundamental principle because the investor typically lacks a traditional insurable interest in the insured’s life. These policies are often viewed as a form of human life wager, where the investor stands to gain solely from the insured’s demise. This absence of a genuine insurable interest at the policy’s inception is the core of the legal controversy surrounding IOLI.

Many states have enacted laws, often based on the Stranger-Originated Life Insurance (STOLI) model, that specifically prohibit or invalidate IOLI due to the lack of insurable interest at the policy’s start. Policies found to be IOLI may be deemed void ab initio, meaning they were invalid from the very beginning. If an IOLI policy is found to be illegal or void, the potential consequences can include the cancellation of the policy and the return of premiums, or the death benefit not being paid to the investor.