What Is Stranger-Originated Life Insurance (STOLI)?

Stranger-Originated Life Insurance (STOLI) is a life insurance arrangement in which a person purchases a life insurance policy primarily for the benefit of an investor or third party who has no legitimate financial interest in that person’s life.

Here’s how it typically works:

• An investor encourages a person (often a senior citizen) to purchase a large life insurance policy.
• The investor may help pay the premiums or provide financing.
• After a certain period, ownership of the policy is transferred to the investor.
• The investor becomes the beneficiary and collects the death benefit when the insured person passes away.

Why Is STOLI a Problem?

Life insurance is intended to protect people who would suffer a financial loss if the insured dies, such as spouses, children, business partners, or lenders. This concept is known as insurable interest.

With STOLI arrangements:

• The policy is purchased primarily as an investment.
• The beneficiary has no genuine insurable interest in the insured’s life.
• The arrangement may violate state insurance laws.

Is STOLI Legal?

Many states have laws that prohibit or restrict STOLI transactions because they are considered contrary to the purpose of life insurance. Insurance companies also actively investigate and challenge suspected STOLI arrangements.

STOLI vs. Life Settlements

It’s important not to confuse STOLI with a legitimate life settlement:

• STOLI: The policy is purchased from the beginning with the intention of selling it to an investor.
• Life Settlement: The policy was originally purchased for a legitimate insurance need, but the owner later decides to sell it to a third party.

Life settlements can be legal and regulated, while STOLI arrangements are often prohibited.

Bottom Line

If someone approaches you about buying a life insurance policy primarily so an investor can eventually own it or profit from it, proceed with caution. STOLI arrangements can create legal, tax, and financial complications and may not comply with state insurance regulations.

If you’re considering selling an existing life insurance policy, speak with a qualified insurance professional or attorney to understand your options and ensure the transaction is legitimate.