NJ Assembly Passes Ban On Stranger-Originated Life Insurance

New Jersey lawmakers appear on their way to passing a prohibition on stranger-originated life insurance.

The state Assembly passed a bill 78-0 last week and sent it to the Senate, which previously introduced the legislation. The Democratic caucus is leading the effort in both houses and Gov. Phil Murphy, D, is likely to sign the final product.

The Assembly bill would establish civil penalties of up to $10,000 plus restitution.

The legislation seeks to "prevent the establishment of trusts or other means to initiate or procure policies for investors under the guise of insurable interest," Assembly Democrats said in a news release.

In New Jersey, life insurance policies can only be taken out by those who stand to suffer financial loss from the death of the individual insured and who have an interest in their continued life – legally understood as insurable interest.

“The tragic loss of life should never be punctuated by a vulturine financial ploy. Life insurance was created to prevent families from becoming destitute after a loss,” said Assemblyman Gary Schaer, D-Bergen, Passaic. “STOLI undermines this intended purpose by rewarding wagers on human life. STOLI policies have led to widespread abuse including exploitation of the elderly and manipulation of policyholders through early cash outs. Those who suffer because of STOLI policies are the beneficiaries life insurance is meant to protect.”

'Bold And Direct Response'

The legislation follows the 2019 ruling handed down by the New Jersey Supreme Court in Sun Life Assurance v. Wells Fargo, which reaffirmed that STOLI transactions counter standards set forth in existing state law.

Cozen O'Connor, the law firm representing Sun Life in the case, called the legislation a "bold and direct response" to the Supreme Court decision.

In the case, a $5 million life insurance policy, insuring the life of Nancy Bergman, was applied for and initially owned by a trust set up in the insured’s name. The insured’s grandson was trustee and beneficiary of the trust, and with the premiums funded by stranger investors.

The U.S. District Court for the District of New Jersey ruled that the policy was a void wagering policy under New Jersey; no death benefit was payable; and premiums paid by the subsequent policy owner, which acquired the policy on the secondary market and was not involved in the origination of the policy, were to be refunded.

The $5 million policy at issue in Bergman was part of a larger scheme in which a total of five policies (issued by multiple insurers) with a total face amount of $37 million were allegedly taken out by stranger investors on an elderly insured’s life, Cozen O'Connor noted.

The early 2000s ushered in the opportunistic era of stranger-originated life insurance (STOLI), which threatened the future of the life insurance industry by circumventing insurable interest laws. Today the practice has largely disappeared.

A handful of states have addressed the legality of STOLI policies, including New York, Delaware and Florida.

Under the New Jersey measure, any person would be prohibited from directly or indirectly engaging in any act, practice or arrangement that constitutes stranger-originated life insurance. It further asserts any agreements facilitating STOLI practices are void from the outset.

“We need to stop people from subverting the intent of life insurance policies and prevent those who would fraudulently engage in the purchase of a policy from being able to do so,” said Assemblyman Gordon Johnson, D-Bergen.

“These practices are harmful and can impact the ability to take out a life insurance policy later when it’s truly needed. It’s only by eliminating the market for such predatory transactions that we strengthen protections for New Jersey residents and families.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.