Stranger Originated Life Insurance (STOLI) violates which principle?

Stranger Originated Life Insurance (STOLI) violates the principle of legal purpose, specifically the concept of insurable interest. Insurable interest is a fundamental requirement in insurance that mandates the policyholder must have a legitimate interest in the life of the insured. This means that the policyholder would suffer a financial loss or hardship upon the death of the insured.

In the case of STOLI, the policyholder typically has no real relationship or financial interest in the insured individual; often, they are involved for the sole purpose of benefiting from the policy’s proceeds. This circumvents the essential insurance principle, as it allows individuals to enter into insurance contracts without any real stake in the life they are insuring, leading to potential abuses in the insurance system.

The other options, while relevant to general insurance concepts, do not fundamentally pertain to the core problem created by STOLI. Equity in insurance premiums and mandatory coverage requirements deal with how premiums are calculated and the coverage that must be maintained, while agent licensing regulations pertain to the qualifications of agents selling insurance products. None of these directly address the insurable interest aspect central to the legality and ethical nature of life insurance contracts.