Introduction
Investor-originated life insurance (IOLI), also known as stranger-originated life insurance (STOLI), is a controversial practice that involves investors purchasing life insurance policies on the lives of individuals with the intention of selling the policies to third-party investors. While this practice has been met with criticism and legal challenges, there are parties involved who may benefit from investor-originated life insurance.
Benefits for Investors
Profit potential: One of the primary motivations for investors to engage in IOLI is the potential for significant profits. By purchasing life insurance policies at a discounted rate and then selling them to investors at a higher price, investors can generate substantial returns on their investment.
Diversification: Investor-originated life insurance can provide investors with an opportunity to diversify their investment portfolios. Life insurance policies can be seen as an alternative asset class that is not directly correlated with traditional investments such as stocks or bonds. This diversification can help investors mitigate risk and potentially enhance their overall investment performance.
Benefits for Policy Sellers
Immediate cash flow: Individuals who sell their life insurance policies through IOLI arrangements can receive an immediate cash payment. This can be particularly beneficial for policyholders who may be facing financial difficulties or have an immediate need for liquidity.
Relief from premium payments: By selling their life insurance policies, policyholders can relieve themselves from the burden of paying ongoing premiums. This can be especially advantageous for individuals who can no longer afford the premiums or no longer have a need for the coverage.
Benefits for Investors in the Secondary Market
Access to unique investment opportunities: Investors in the secondary market who purchase life insurance policies through IOLI arrangements gain access to unique investment opportunities that may not be available through traditional investment channels. These policies can offer potentially attractive returns and diversification benefits.
Portfolio hedging: Life insurance policies acquired through IOLI can serve as a hedge against other investments in an investor’s portfolio. In the event of market downturns or economic uncertainties, the cash value or death benefit of the policies can provide a source of stability and protection.
Conclusion
Investor-originated life insurance, while controversial, provides benefits to various parties involved. Investors can potentially generate profits and diversify their portfolios, while policy sellers can receive immediate cash flow and relief from premium payments. Investors in the secondary market can access unique investment opportunities and use these policies as a hedge in their portfolios. However, it is important to consider the ethical and legal implications of IOLI, as it has faced criticism and legal challenges in many jurisdictions.
References
1. investopedia.com
2. forbes.com
3. lifehealth.com
