What Is STOLI (Stranger-Originated Life Insurance)?

Stranger-Originated Life Insurance (STOLI) refers to life insurance policies initiated by individuals or entities who have no personal connection or financial stake in the insured person’s life. These arrangements are designed as investment vehicles, where an outside investor profits from the death benefit, rather than providing financial protection for beneficiaries. This article defines STOLI, explores the foundational principle of insurable interest it often violates, and distinguishes it from legitimate life settlement transactions.

What is Stranger-Originated Life Insurance (STOLI)?

Stranger-Originated Life Insurance (STOLI) describes an arrangement where a life insurance policy is procured by a third party, often an investor group, on an individual with whom they have no existing relationship or insurable interest at policy inception. The insurance is purchased purely as a speculative investment, rather than to provide for the insured’s beneficiaries. This differs significantly from traditional life insurance, where the policyholder intends to protect loved ones or business interests.

STOLI schemes often involve approaching individuals, frequently seniors, to participate. These individuals might be offered a direct payment or other financial inducements in exchange for taking out a large life insurance policy. Third-party investors or brokers facilitate the application process, sometimes covering initial premiums, with the pre-arranged intent to acquire ownership of the policy shortly after its issuance.

Promoters of STOLI schemes may market these arrangements using deceptive terms such as “zero premium life insurance” or “estate maximization plans.” The policy is secured with the explicit intention of being sold to investors who stand to gain the death benefit upon the insured’s passing. This arrangement bypasses the traditional purpose of life insurance, which is to protect against financial loss.

The individual whose life is insured may be unaware of the ultimate intent or be enticed by the immediate financial incentive. The policy’s primary function in a STOLI arrangement is not to provide security for the insured’s family or dependents. Instead, it serves as a commodity for investors to trade and profit from, representing a financial bet on the longevity of the insured individual.

The Insurable Interest Principle

The concept of “insurable interest” is a fundamental legal requirement for a valid life insurance policy. This principle dictates that the policy owner must have a genuine financial or emotional stake in the continued life of the insured person at the time the policy is purchased. Without this interest, a life insurance contract can be viewed as a mere wager on someone’s life, which is generally against public policy.

This requirement prevents individuals from profiting from the death of strangers and mitigates moral hazards. The insurable interest ensures that the policyholder would suffer a recognized loss if the insured were to pass away.

Examples of legitimate insurable interest include spouses, parents, and business partners. An employer also has an insurable interest in a key employee, as their death would result in a financial detriment to the business. A creditor may have an insurable interest in a debtor’s life, limited to the amount of the outstanding debt.

STOLI schemes directly violate this principle by originating policies where the policy owner or beneficiary lacks a pre-existing, legitimate insurable interest at policy inception. The investor group, acting as the ultimate beneficiary, has no relationship with the insured other than the financial prospect of the death benefit. The intent is for a stranger to profit from the insured’s mortality, which contradicts the protective nature of life insurance.

STOLI vs. Legitimate Life Settlements

Life settlements and viatical settlements represent legitimate financial transactions where an existing life insurance policy is sold to a third party. In a life settlement, a policyholder sells their policy for a sum greater than its cash surrender value but less than its full death benefit, often when they no longer need or can afford the coverage. Viatical settlements are a specific type of life settlement typically involving policyholders with a terminal or chronic illness, allowing them to access a portion of their death benefit while still alive.

The key distinguishing factor between these legitimate settlements and STOLI lies in the timing of the intent and the existence of insurable interest. In a legitimate life settlement, the policy was originally purchased by the insured with a valid insurable interest, such as for family protection or estate planning. The decision to sell the policy occurs later, driven by changing financial needs or life circumstances, not by an original intent to create an investment for a stranger.

STOLI arrangements involve policies initiated from the very beginning with the intent for a third-party investor, who lacks insurable interest, to own and profit from the policy. The policy’s inception is not rooted in the traditional purpose of providing financial security to those with a genuine interest in the insured’s life. Instead, it is designed as a speculative investment, often with the insured receiving a one-time payment for their participation in what is essentially a wagering contract.

STOLI schemes fundamentally lack insurable interest at policy origination and are viewed as speculative wagers on human lives. They are generally considered illegal or unenforceable in most jurisdictions. Many states have enacted legislation to prohibit these arrangements, classifying them as fraudulent acts. This contrasts sharply with life settlements, which are regulated financial products designed to provide liquidity to policyholders who genuinely no longer require their existing coverage. While both involve a third party acquiring a policy, the fundamental difference in purpose, origin, and adherence to the insurable interest principle makes STOLI a distinctly prohibited practice compared to regulated life settlements.