Which situation might lead to an insurable interest dilemma?

Stranger Originated Life Insurance (STOLI) transactions present a unique situation that could lead to an insurable interest dilemma. In a STOLI arrangement, investors purchase life insurance policies on individuals with whom they have no significant relationship, often with the intention of profiting from the death benefit. This creates potential ethical and financial concerns, challenging the fundamental principle of insurable interest, which dictates that the policyholder must have a genuine interest in the continued life of the insured.

In standard cases, such as family members applying for life insurance, business partnerships insuring key personnel, or employers providing group health insurance, an established insurable interest typically exists. Family ties, partnership dynamics, and employer-employee relationships naturally create a vested interest in ensuring the protection or well-being of the insured parties. STOLI, in contrast, undermines this principle because the investors do not stand to lose anything if the insured individual remains alive, leading to moral hazards and potential exploitation of the insurance system.