State RegulationsAZ specificDifficulty 2/5
A Scottsdale investor offers to pay an elderly Arizona resident a fee if she applies for a new life insurance policy naming the investor as owner and beneficiary. The investor has no relationship with her and plans to resell the policy to other investors. Under Arizona law, this arrangement is:
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Under A.R.S. 20-443.02, Arizona prohibits stranger-originated life insurance — arrangements in which parties with no insurable interest initiate or control a new policy expecting to profit from the death of the insured. The investor's plan to induce a stranger to apply solely for resale is the classic STOLI scheme. Producers and insurers who facilitate such arrangements face regulatory action by the Arizona Department of Insurance and Financial Institutions.
Why the other options are wrong
- A) Regulating the resale of an existing policy is not the same as inducing a new policy with no insurable interest; the scheme is banned at inception, not cured by policy age.
- C) A.R.S. 20-443.02 targets the lack of insurable interest at issue; an investor cannot lawfully create the interest retroactively after the policy is placed.
- D) A legitimate settlement or viatical transaction involves an existing policyowner selling an in-force policy, not engineering a new policy for a stranger's profit.
Memory hook
Strangers sponsoring policies for resale = STOLI = banned under Arizona law.