See: Life Insurance.
If someone asks if you're interested in buying a STOLI, you should not automatically assume they're pushing vodka. So not the same thing.
“STOLI” stands for “stranger-owned life insurance,” and if “stranger danger” is echoing in anyone’s ears right now, it should be. A STOLI is a life insurance policy that we buy and then turn around and instantly sell to someone that couldn’t legally buy it for themselves. STOLIs are illegal pretty much everywhere, and even in places where they’re not, they’re super-duper restricted and carefully scrutinized.
A STOLI works like this: a shady individual, or, more likely, a shady group of individuals, approaches someone (let’s call her Veronica) about life insurance. They want her to buy herself a nice life insurance policy. Then they’ll pay her one big ol’ lump sum in return for the policy. She gets money now, and then when she buys the farm, the folks who purchased her policy get the payout.
Not only does this sound like the beginning of one of those true crime murder documentaries where someone gets killed for their life insurance, it’s also considered financial fraud in, like, 99.9% of cases. Why? Because of insurable interest. When we insure something, it's because we care about it and would be negatively impacted by its loss. A random stranger, or group of strangers, doesn’t have an insurable interest in another random stranger’s life. Not to be crass, but they wouldn’t care if Veronica fell off a cliff tomorrow. They’re just interested in the payout, which means that, technically, Veronica’s worthless to them until she dies. And in the eyes of most state laws, that’s just not right. Life insurance is supposed to take care of the folks who will be bereft and need help after our death, not line the pockets of some morbid strangers in an office building somewhere.
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Finance: What is insurance: deductibles,...12 Views
and finance Allah shmoop What is insurance Shmoop All right
people This is you nervous Nellie You're worried about your
house and well here is your house Your house and
Lynn carry a book value I eat what you paid
for it last year of $300,000 You realise that some
night you may hear it rumbling and it won't be
from your stomach And you'll come fully awake surfing on
your chimney at 90 miles an hour down the road
If this happens you're home will become duck Disneyland And
well it's 300,000 Dollar value will likely be worth something
close Teo zero You can stomach paying $10,000 from these
damages out of your own piggy bank to go find
a new home But you want someone else to pay
the $290,000 gap to go buy an equivalent place somewhere
else with a you know nice view of the valley
Good thing you bought term real estate insurance That is
You pay 800 bucks a month What's called a premium
in return for a Sam Schmucks insurance company being willing
to pay for a new home for you showed your
old home B You know damn well that $800 premium
you pay every month is a bet that the insurance
company is betting your house will be fine and trust
us They want your house to be fine because well
then they can keep collecting your monthly premiums almost 10
grand a year and sit on their hands In the
meantime an update their Facebook pages and the economics makes
sense Sam Schmuck insures 49 other homes just like yours
collecting 10 grand a year from each for total revenues
Sam Schmucks of 500,000 bucks a year if they had
to replace an entire home at a cost of 290,000
every year Well Sam schmuck is still profiting handsomely from
the engagement You're on the other end of the bed
Your bed in your house will not be fine Otherwise
you probably would not have gotten the insurance in the
first place You wanted to have that safety net for
your worry Well this is the stuff of insurance reducing
risk by entering a contract where one party agrees to
compensate another party in the case of specific damage or
losses in exchange for premium payments Yeah that's insurance You
pay the insurance company premiums every month and they pay
you well when you need it If you're home isn't
washed away this month well then you lose all 800
bucks premium that you've paid And Sam Schmucks Insurance Company
keeps it so you can do the math if 10
years go by and your house still hasn't been washed
away While Sam Schmuck has collected 10 years of a
10 grand per year from you and since that money
is reinvested in bonds and stocks and other investments while
Sam Schmucks earnings are compounding that is Sam's rolling in
all that premium payment money and the interest he's earning
on it invested collectively after 10 years Well if it
follows a roughly with the markets do thereabouts it'll double
or more to clarify That is 10 years of 10
grand and payments is only 100 grand Yet your home
has financial exposure to Sam Schmuck of 290 grand So
how is it that 10 years of payments totaling 100
grand can be worth 290 Well when Sam receives your
money he invested in some form of the stock and
or bond market and that money then earns a financial
return such that it grows at a nice clip And
he's presuming that your home will last at least 10
years before it gets Ah washed away to the sea
And remember he has dozens of homes He's ensuring and
all those will likely not get washed away Right So
yes we're guessing on the numbers But it's pretty reasonable
to think about numbers doubling in and changing or so
like that in every decade and change But what if
your house did wash away well After all it's in
an obviously precarious position and you just couldn't say no
to the view Could you worth the risk You told
yourself if you woke up one day to beavers as
your new neighbors Well you'd be looking to Sam Schmuck
to pay acclaim and get that insurance dough to go
buy another home But First Mister Schmuck reminds you that
you must pay the $10,000 deductible deductible is the dough
you pay first before the insurance company's money kicks in
Well this means that in a calamity you must pay
for the 1st 10,000 bucks before you see any dollars
from Sam Schmucks Insurance Company Sam Schmucks Insurance Company and
deals and all kinds of shmoop O R Insurance You've
got health insurance betting on your health continuing its life
insurance betting on you living another month car insurance button
on your car's life homeowner's insurance betting on your home's
life like that property insurance betting on your possessions and
someone when the risk makes you feel uncomfortable enough while
so much so that you're willing to pay to reduce
that risk Well somewhere out there and insurance agents Spidey
senses become engaged and they'll find you Well okay maybe
I'll type it into Google first Then they'll find you
Insurance companies stay afloat because while they're working with a
lot of data to help them make smart bets remember
every insurance policy is filled with tons of fine print
Like if you break your pinky toe it's totally covered
But the tone next to your pinky toe well that
one's eso Well insurance companies take all of that data
and crunch the numbers to make policies that are attractive
enough to get people to buy them But our waited
enough toward the insurance company is that it's worth it
for them to take that risk Ideally they'll make few
payouts and keep the premium payments rolling in But don't
worry Even insurance companies have insurance like usually other insurance
companies in a magical dance of risk sharing called reinsurance
That's why the insurance market doesn't crack into bits when
an entire city pulls in Atlantis and goes underwater Now
put your poker face on or some snorkel gear and
ask yourself What's worth the risk Is it worth it
to go skydiving without health insurance Is it worth the
risk to own a house next to a forest without
fire insurance What's worth those monthly premium payments that go
down You're draining into Sam schmucks pockets Yeah well only 00:05:13.449 --> [endTime] you can say good luck
