Here is an interesting concept, investing on the life of a stranger, or, infact, investing on the years remaining in a stranger's life. If this sounds strange to you, warm yourself up to the idea of calculating your ROI based on how much longer your investment subject lives, because this is becoming one of the hottest trends in the investment industry. 

STOLI, or stranger-originated life insurance, is life insurance issued on the life of someone as part of a transaction in which they agree to transfer the policy to a “stranger.” The new owner could be one person, or a group of investors.

Once the policy is transferred, the owner continues to pay the premium until the seller dies. When the insured dies, the investor gets paid. Those often targeted for this arrangement are seniors, ages 65 to 85, encouraged to sign up for new life insurance policies they will then sell for a buyout.

According to the nonpartisan House Research Department, investors are attracted to these arrangements — also known as “death bonds” — because their return on investment is not dependent on the stock market, or the insured’s financial performance.

The goal is to make the investors money, not to provide financial security for the insured.

In California, two men were indicted in 2006 for conning dozens of members of a church to take out life insurance policies with promises of quick money for the church. The policies were sold to investors with the understanding that the return on the investment would be high because the church members “were predominantly African Americans and had a higher mortality rate than the average population,” according to the indictment.

At least 20 states are considering legislation dealing with the life settlement industry and STOLI. This session, two bills have been introduced in Minnesota.

HF3534, sponsored by Rep. Kate Knuth (DFL-New Brighton), calls for a five-year period between the time a life insurance policy is issued and the time any type of life settlement agreement could be reached. The bill is based on the Viatical Settlements Model Act of the National Association of Insurance Commissioners. It awaits action by the House Commerce and Labor Committee.

“A life insurance policy that is just made for someone else dying as an investment is bad,” Knuth said. “The people who need a life insurance policy, and those who buy and sell them, no one wants it to get out of hand. The question is: How do we decide to regulate?”

A companion bill, SF3063, sponsored by Sen. Linda Scheid (DFL-Brooklyn Park), awaits action by the the Senate Commerce and Consumer Protection Committee.

Another bill takes a slightly different tact. HF3878, sponsored by Rep. Leon Lillie (DFL-North St. Paul), also focuses on restrictions to STOLI practices, but does not have the five-year waiting period. The bill adopts language supported by the National Conference of Insurance Legislators. It, too, awaits action by the House Commerce and Labor Committee.

“It’s hard to think of life insurance like a house, or as a product or property that someone might own, but it is.” And with the bill that he has introduced, “you would be able to cash out if you want to.”

Though he is still learning about many of the issues involved, Lillie agrees that the STOLI problems need to be addressed, even though the consumer issue is just as important. “If you own something, you should be able to sell it.”

A companion bill, SF3495, sponsored by Sen. Dan Sparks (DFL-Austin), awaits action by the the Senate Commerce and Consumer Protection Committee.