Stranger-Originated Life Insurance (STOLI) Policies

Life insurance is primarily designed to help policyholders protect loved ones, business partners, and other people with whom they have relationships. It helps to ensure these parties remain financially secure should the policyholder pass away.

However, an exception called stranger-originated life insurance exists. While those offering this policy type may seem to have your best interest in mind, these policies are generally unethical and, in many cases, illegal. Let’s dive deeper into how stranger-originated life insurance works and why you should avoid it.

What is stranger-originated life insurance?

Stranger-originated life insurance, or STOLI, sometimes called stranger-owned life insurance, is a life insurance arrangement where someone buys a life insurance policy on another individual, usually someone they don’t know. When the insured individual passes away, the purchaser receives the death benefit. These policies are often treated as investments rather than financial protection for beneficiaries.¹

Is stranger-originated life insurance legal?

STOLI arrangements are generally illegal in many states and localities.¹ This is because life insurance is designed primarily to help people with an insurable interest in the policyholder. Someone with an insurable interest could suffer emotional and financial loss if the policyholder passes away. For example, if you’re a parent, your spouse and children have an insurable interest in you.

STOLI policies attempt to bypass the insurable interest requirement to get a policy on someone whom the policyholder has no insurable interest in. This creates ethical issues. The policyholder is essentially speculating on human life. They have an interest in the policyholder passing away as soon as possible to minimize premiums and get the death benefit quickly. This can also lead the investor to commit life insurance fraud to collect the death benefit. Furthermore, the investor or broker could gain access to confidential information involved in the policy, such as your health status or job.

How stranger-originated life insurance policies work

Generally, the person whose life the policy insurers must consent to the policy before it activates, helping to prevent STOLI policies. However, investors and brokers try to get around this. Here is how the STOLI process typically plays out:²

• An investor or broker approaches the potential insured person, usually a senior or someone with limited life expectancy. They offer the potential insured person a loan to purchase life insurance on themselves.
• The potential insured person applies for a policy at the designated insurance company and awaits approval.
• The applicant pays the premium and begins coverage.
• The new policyholder holds the policy for a specified period, then transfers the policy to the investor or broker. The investor or broker may pay an additional lump sum.
• The investor or broker begins paying premiums.

From there, the investor or broker can sell the policy or hold it until you pass away. It’s crucial to note that investors or brokers typically approach seniors or those with limited life expectancy, especially if they detect their target is in tough financial times and need funds quickly.²