Rhode Island Life Insurance Practice Exam

Stranger Originated Life Insurance (STOLI) violates which contractual element?

1. Legal Purpose (insurable interest)

2. Contractual capacity

3. Mutual consent

4. Legality of object

The correct answer is: Legal Purpose (insurable interest)

Stranger Originated Life Insurance (STOLI) violates the principle of insurable interest, which is a fundamental requirement for a valid life insurance contract. Insurable interest means that the policyholder must have a reasonable expectation of benefit or a direct interest in the life of the insured individual. This interest typically arises from relationships such as family ties, business partnerships, or other significant connections. In the case of STOLI, individuals or entities purchase life insurance policies on the lives of strangers, without any genuine relationship or insurable interest in those individuals. The financial motives behind STOLI are often speculative, as the policyholder's primary interest lies in the potential for profit, rather than in the wellbeing of the insured. This lack of insurable interest undermines the integrity of the insurance contract, leading to its classification as a violation of the legal standards governing life insurance agreements. Other options, while relevant to contractual law and insurance principles, do not specifically address the core issue with STOLI, which centers around the absence of a legitimate insurable interest.