A promoter induces an elderly person to buy a life insurance policy with the intent of immediately selling the policy to third-party investors who have no insurable interest in the insured's life. This practice is known as:

Why A is correct

Stranger-originated life insurance (STOLI) is the practice of purchasing a life policy as an investment for strangers who lack an insurable interest in the insured, typically with the intent to sell the policy shortly after issue. STOLI transactions are fraudulent and prohibited under California's life settlement laws (CIC Section 10113.1 et seq.), which require a legitimate insurable interest and restrict who may buy and settle life policies.

Why the other options are wrong

• B) A viatical settlement is the legitimate sale of an existing life policy by a terminally ill insured to receive cash while living; it does not involve a stranger originating the policy.
• C) A policy loan is the policyowner borrowing against the policy's cash value; no transfer of ownership to investors occurs.
• D) A Section 1035 exchange is a tax-free exchange of one life policy or annuity for another by the owner; it does not involve investors buying a stranger's policy.

Memory hook

STOLI = strangers cooking up a policy they have no right to own. No insurable interest means fraud.