What is Stranger Originated Life Insurance (STOLI) and how does it work?

The old phrase “stranger danger” takes on a new meaning when you’re talking about life insurance. The danger lies in an illegal practice called “Stranger Originated Life Insurance,” or STOLI.

Life insurance, like many other aspects of personal finance, is a complicated industry with its own lingo and jargon. It’s easy to be perplexed by terminology like “STOLI.” The issue is that misinterpreting STOLI can have major legal and financial ramifications. STOLI is illegal under state insurance law.

If you mistakenly become involved in a STOLI policy, you may face criminal charges. If you mistakenly link STOLI with life settlements, on the other hand, you may end up selling your unwanted life insurance for less than it’s worth.

Learning more about STOLI empowers you to protect yourself from insurance scams. It may also clarify how you can legally sell your life insurance policy for top dollar. Read on for a full review of what STOLI is and what it isn’t.

What Is Stranger-Owned Life Insurance?

There is a policy owner and an insured in every life insurance policy. Often, but not always, these are the same person. When the insured and the policyholder are not the same people, the policyholder must have an “insurable interest” in the insured. This means that the policyholder must profit financially from the insured’s continued health and well-being.

STOLI is a type of life insurance policy in which the policyholder and the insured have no insurable interest in each other. STOLI is prohibited, and state law frequently regards it as human life wagering.

You can’t lawfully acquire life insurance from your mother’s elderly neighbor if you have no interest in the neighbor’s long-term health.

You will not suffer any bad effects and will not suffer any financial loss as a result of your neighbor’s death. You cannot lawfully profit from your neighbor’s death in this situation.

You might, on the other hand, purchase life insurance for your household’s breadwinner, your spouse. Because you benefit financially from your spouse’s prolonged capacity to work, there is insurable interest in such a situation. As a result, you are eligible to profit financially from your spouse’s death.

Investor-originated life insurance, or SOLI, is another name for STOLI.

Stranger-owned life insurance (STOLI) is an arrangement in which an investor holds a life insurance policy without an insurable interest. Without an insurable interest, the investor would ordinarily be prohibited from purchasing the original policy.

Understanding Stranger-Owned Life Insurance (STOLI)

Stranger-owned life insurance (STOLI), also known as stranger-originated life insurance, is a way to buy life insurance without having to meet the insurable-interest criteria. The purchaser must have an insurable interest in the insured in order to properly purchase life insurance.

This signifies that the insured’s death would have a negative impact on the policyholder’s finances. Some definitions of insurable interest necessitate a loving relationship between the buyer and the insured, such as that which exists between spouses or parents and children.


  • Stranger-Owned Life Insurance policies are owed by third-parties, usually investors, with no insurable interest.
  • SOLI policies are often offered in exchange for loans that the insured can use during their lifetime.
  • SOLI is illegal as it gives the policyholder, who has no insurable interest or relationship with the insured, an advantage in the insured’s death.

STOLI arrangements are broadly illegal, and many schemes include fraudulent financial reporting. For example, a senior citizen uses falsely exaggerated financial numbers to purchase an inordinately large life insurance policy. In exchange, a third party agrees to finance the premiums.

Eventually, the original purchaser puts the policy into a trust before selling it to the third-party lender for a cash payment. The insured gets “free” money. The third-party lender gets a large life insurance policy that pays a tax-free benefit when the insured dies.

Criticism of Stranger-Owned Life Insurance

STOLI is unethical because of the lack of insurable interest. If the policyholder has an insurable interest in the insured, it’s logical to suppose that they want the insured to live a long life rather than die young in order to collect the death benefit.

Without the insurable interest, the policyholder is more interested in the insured’s death, which brings the agreement to a close and benefits the third party.

Corporate-owned life insurance (COLI) is legal and, to some, ethical because it has an insurable interest. While COLI insurance collects premiums from the employer beneficiary, the financial value of the insured employee to the firm motivates the employer to be concerned about the insured’s health and well-being.

Employees may be apprehensive about a company-owned policy, even if it is broadly lawful and frequently adopted. Before murdering his employees, H. H. Holmes, a nineteenth-century businessman, and the first known US serial murderer, famously purchased life insurance policies on them.

As a result, the granting of life insurance is subject to a number of conditions, including the insured’s assent.

How Does Stranger Originated Life Insurance Work?

STOLI occurs when someone seeks to profit financially from the death of a senior. It might happen with or without the knowledge of the senior.

For example, a person can offer to pay the senior a few thousand dollars in exchange for his or her cooperation with the insurance application and medical exam. That person would then agree to pay for all insurance premiums.

The con can go one of two ways. The person can either wait to collect the death benefit or sell the insurance to a third-party investor for cash.

That life insurance policy is void, even with the senior’s consent. The insured senior receives only a little portion of the policy’s value, while the person who pays the premiums and any other investors profit significantly.

In other situations, the senior might not even know a policy has been issued. The California Department of Insurance, for example, has uncovered scams that pay seniors to take “longevity surveys.” These surveys collect medical information which the scammers use later to purchase life insurance on the unsuspecting seniors.

Who Benefits From Stranger Originated Life Insurance?

Ultimately, the recipient of the death benefit is the one who profits most from STOLI. This could be an investor group or an individual.

Investors in New Jersey hoped to profit from STOLI, according to a case study. The policy in question covered a woman named Nancy Bergman for $5 million. The policy was owned by a trust in Bergman’s name, with Bergman’s grandson as the trust beneficiary. The policy premiums were supplied by investors who had no personal ties to the insured.

The policy was declared STOLI by the New Jersey Supreme Court in 2019. As a result, it was found to be in violation of the state’s insurable interest statute, the state constitution, anti-gambling laws, and public policy against gaming.

A federal judge found Daniel E. Carpenter guilty of conspiracy, mail fraud, wire fraud, and money laundering in 2016 for his role in the STOLI scheme. Carpenter and another guy sought for and received life insurance policies on seniors falsely, intending to collect the death payments later.

“A STOLI policy differs from a standard policy in that it is not issued for estate planning purposes but for transfer to an investor with no insurable interest in the insured’s life,” the judgment explains.

Is Stranger Originated Life Insurance Legal?

STOLI is not legal. The legality hinges on the presence of insurable interest at the policy’s origination. If there’s no insurable interest between the policyholder and insured when the policy is issued, the policy is invalid. The policyholder has probably committed fraud and illegal wagering.

How to Avoid Stranger-Originated Life Insurance Schemes

Seniors are targeted by STOLI scammers in a variety of ways. They can accomplish it by duping you into filling out a phony “survey” using your medical information. Alternatively, they may urge you to apply for life insurance on their behalf. Unscrupulous insurance agents may even use information from previous policies to apply for new coverage.

Be mindful of disclosing your medical information in a way that might be traced back to you. An anonymous survey may not be a problem, but you don’t want to give out your name, date of birth, Social Security number, or medical history to anyone you don’t know.

That’s all the information you’ll need to fill out a life insurance application. You should also have complete faith in your insurance agent, as he or she already has access to your personal data.

Also, watch out for anyone who offers you compensation to apply for life insurance. No valid life insurance policy gives you a bonus for completing an application. As well, there’s no such thing as life insurance without premiums. If you complete a life insurance application for someone who says there are no premiums, it’s very likely fraud.

Life Settlements Are Legal, STOLI Is Not

Life settlements and STOLI can be confused with one another, but they are very different. A life settlement is the legal transfer of a valid life insurance policy from its owner to a third-party investor. STOLI is specifically a new policy that is initiated with the intent of financial gain where there is no insurable interest.

Understanding this distinction is important. A life settlement is a valid, regulated financial transaction that can help you maximize the value of your life insurance policy.

As quoted from the California Department of Insurance, “Life settlements can be a favorable option for a senior to access the death benefit of a policy for which he or she no longer has a good economic need to keep it in force.”

Reach out to Harbor Life Settlements to learn more about life settlements and to get a free estimate on the market value of your life insurance.

Special Considerations

A common workaround of the insurable-interest requirement is to manufacture it, as in the hypothetical situation above. An investor seeking to take out a life insurance policy on a stranger may manufacture insurable interest instantly by granting that stranger a loan.

The stranger’s death would leave the loan unrepaid, fulfilling the most skeletal definition of insurable interest.

Despite the Internal Revenue Service and state governments having a distaste for STOLI, as well as insurance companies’ increasing vigilance, the practice persists.

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