A stranger originated life insurance policy is taken out at the behest of investors who seek to make a profit upon the death of the named insured, usually a very elderly or terminally ill person. The investors are named as beneficiaries or are sold the policy. They will pay the premiums and give the named insured a financial inducement to take out the policy.
Some stranger originated life insurance schemes involve variable annuities, which are sold by insurance companies primarily as investment vehicles. Thus, there often is no scrutiny into the health of the purchaser, called an annuitant, or into that person's relationship with any beneficiary or later buyer of the annuity. Annuities are attractive because they typically include a "death benefit" that amounts to a money-back guarantee on the principal amount invested, sometimes with interest, if the value of the underlying investment account falls.
There are numerous ethical and legal questions concerning stranger originated life insurance, which is being challenged by insurers and is subjected to increasing scrutiny and restrictions by state and federal regulators. There are reported cases of extreme abuse involving forged or fraudulent policy applications, including policies taken out without the knowledge of the named insured.
While there are some similarities between stranger originated life insurance and life settlements, there is a crucial difference. In a typical life settlement scenario, the named insured already had a life insurance policy before deciding to sell it to one or more investors.
Source: "Investors Recruit Terminally Ill To Outwit Insurers on Annuities," The Wall Street Journal, 2/16/10.
A scheme with a similar concept, often perpetrated by the same operators, involves so-called deathbed bonds.
