Stranger-owned life insurance (STOLI or SOLI), or stranger-originated life insurance, is a life insurance policy taken out on someone by a third party without any insurable interest. Investor-owned life insurance (IOLI), is a similar arrangement in which the third party is always an investor.
It’s illegal to participate in a STOLI or IOLI agreement, which amounts to gambling on someone’s life expectancy and usually requires concealing information from an insurance provider. Though legal cases against stranger-originated policies go back for decades, the practice hasn’t completely disappeared.
Here’s what you need to know about STOLI and the legal ways to include a third party in your insurance agreements.
An individual or an investor not associated with the insured owns and pays the premiums for STOLI and IOLI.
The insured usually agrees to a stranger-owned policy in exchange for compensation.
Stranger-owned life insurance is illegal because the purchaser of the policy has no insurable interest in the insured.
You can take a policy out on a loved one if their death would impact you financially.
How does stranger-owned life insurance work?
In a stranger-owned or investor-owned life insurance arrangement, a third party buys a life insurance policy on someone, usually a senior in whom they have no insurable interest, and pays the premiums.
These third parties usually target seniors who are healthy enough to outlive their policy’s contestability period — making it less likely an insurance company would investigate their death claim — and collect the insurance payout after that person passes away.
Some STOLI investors bring insurance agents or the insured person themselves into the scheme. They'll get agents to sell fraudulent policies with the promise of high commissions and offer the insured an upfront payment to participate.
Origins of stranger-owned life insurance
Stranger-owned life insurance dates back to the 1700s or earlier,  when people would take out policies on someone they knew to be in poor health to reap the benefits. With little life insurance regulation and fewer medical records available to insurers at the time, it was easier to fool a life insurance company.
In 1881, the U.S. Supreme Court made it illegal to take out a life insurance policy on someone if you don't rely on them financially.  Numerous legal cases in the early 2000s spurred several states to explicitly ban STOLI, but the practice didn't end. 
When can you take a life insurance policy out on someone else?
There are circumstances where it’s reasonable — and legal — to buy a life insurance policy on someone else. You might do so to insure against the financial impact of losing:
In every case, you need to prove that you have an insurable interest in that person. You also need their explicit permission and participation in underwriting to go through the application process.
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Is it legal to sell your life insurance policy?
It is legal to sell your life insurance policy, a transaction known as a viatical settlement. Life settlement brokers buy existing policies from ill and elderly people and continue paying the premiums in exchange for the death benefit payout when they die.
Viatical settlements are legal as long as the original policy owner proved insurable interest when they purchased the policy. However, selling your policy is usually more hassle than it’s worth, as it can be difficult to find a buyer and the sale comes with high taxes and fees.
Stranger-owned and investor-owned life insurance policies are rare due to strong life insurance regulations, but they do still exist. Always work with a trustworthy independent life insurance broker to buy life insurance or take a policy out on a loved one.
Frequently asked questions
What is stranger-owned life insurance (STOLI) and investor-owned life insurance (IOLI)?
STOLI is a policy taken out by a third party on someone in whom they have no insurable interest. IOLI is a similar practice, but the third party is always an investor.
Can you take out a life insurance policy on a stranger?
You can't take life insurance out on someone if you don't depend on them financially and if you don't have their consent.
Are stranger-originated life insurance policies legal?
It's illegal to be part of a stranger-originated or investor-originated life insurance policy scheme.