What is the general legal status of Stranger-Originated Life Insurance (STOLI) in California?

The correct answer highlights that Stranger-Originated Life Insurance (STOLI) is considered illegal in California primarily due to the absence of an insurable interest. In general, insurable interest refers to a legal or financial stake in the continued life of the insured. For life insurance to be valid, the policyholder must have a legitimate reason to take out a policy on someone else's life, typically related to family ties or financial obligations.

In the case of STOLI, individuals or entities purchase life insurance policies on strangers, often with the intention of selling these policies to third parties for profit after a short duration. This practice circumvents the insurable interest requirement, leading to a situation where the individual or organization that buys the policy does not stand to lose anything from the death of the insured.

California law has been clear in identifying STOLI as an illegal transaction because it undermines the fundamental principles of the insurance industry, which are built on the concepts of risk management and insurable interest. Such practices can lead to moral hazards, where the parties involved may have financial incentives to have the insured individual die.

The other options do not accurately reflect the legal status of STOLI in California, as they imply legitimacy or appropriate usage of such insurance