The senior life settlement industry is a fairly new sector; however, over the last decade, it has experienced dramatic growth. Despite the growth, many people still don’t know a lot about life settlements. In fact, a large number of people mistake life settlements for stranger originated life insurance, or STOLI scams. Yet, life settlements are very different than STOLI scams. Here is a look at the difference between these two transactions so that you can avoid losing your investment, or worse, prosecution.

Many people assume that senior life settlements are against the law. However, the good news is that these transactions are very legal indeed. According to the Life Insurance Settlement Association (LISA), a life settlement is “the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit.” Consequently, these transactions are becoming a very popular option for senior citizens who need money.

While life settlements are legal, STOLIs are against the law. A STOLI is when a life insurance policy is created for someone who does not have an insurable interest in the insured. The biggest difference between a life settlement and a STOLI has to do with the idea of insurable interest.

According to LISA, a policyholder through a senior life settlement transaction has an insurable interest in their life insurance policy before selling it for cash. On the other hand, with a STOLI, the transaction is processed by the investor and the policyholder receives a cash payment. Through this type of illegal transaction, an investor gains from attaining death benefits on the plan or selling the policy to other investors.

In addition to the issues mentioned above, STOLIs are also considered wrong for investors. It is common knowledge that if an investor participates in a STOLI, he or she can lose their investment and face criminal prosecution. A life settlements investment, on the other hand, is 100 percent legal.