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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

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Stranger-originated life insurance vs. life settlements

STOLI seems similar to life settlements since both pay policy premiums and receive the death benefit when you pass away after transferring ownership to them. However, some key differences make life settlements a legitimate option:2

  • Legality: Life settlements are legal and strictly regulated in most places to ensure safety and ethical use. Meanwhile, STOLI arrangements are largely illegal.3

  • Purchasers: Life settlements are handled by licensed, regulated life settlement brokers who purchase the policies. STOLIs may be organized by unregulated organizations or individual investors.

  • Creation: A life settlement is created when a policyholder sells an existing legitimate policy. A STOLI is created when a new policy is taken out with the intent to transfer to the investor or broker.

  • Purpose: Life settlements aim to help policyholders who no longer want or need coverage get the largest payout for their existing policy. STOLIs exist for unscrupulous investors to speculate on the insured’s life.

  • Insurable interest: Life settlement policies start out as policies you hold with beneficiaries that have a genuine insurable interest in your life. Only later does a life settlement company, which lacks insurable interest, own the policy. STOLIs are never held by someone with an insurable interest.

  • Target policyholder: Anyone who wants to sell their policy can involve themselves in a life settlement. For STOLIs, investors often approach seniors or those with shorter life expectancies.

Can a stranger take out a life insurance policy on you?

Strangers generally can't take out a life insurance policy on you without your knowledge for two reasons:

  • The stranger must have an insurable interest in your life.
  • Your consent is required before a policy can become active.4

This is why STOLI investors or brokers must approach you rather than simply purchasing a life insurance policy on you. However, this means you can buy life insurance on others that you know in certain situations if you have an insurable interest in them. For example, your spouse can purchase a policy on you. The life insurer involves you in the process, so you may provide your information on the application, take a medical exam if necessary, and sign the policy documents saying you consent to the policy.

Another example would be parents who want to cover their children. They can purchase life insurance for their children in case their child passes away and to help their child start their adult life with a life insurance policy. Children can’t consent until they reach a legal age, but insurers require proof that the applicants are the child's parents.

Learn more about life insurance

STOLIs are largely unethical and illegal, so avoid accepting any offers from investors or brokers urging you to engage in one of these agreements. It’s important to distinguish these from life settlement companies, which can provide a legitimate way to convert your unneeded policy into a substantial payout and only market themselves to people with existing policies. If you have any questions about life insurance or are ready to explore your coverage options, speak with an Aflac agent today to learn more and get a quote.

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