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.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
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.
Although it‘s now illegal to take out a life insurance policy on someone if you don‘t rely on them financially, and numerous legal cases in the early 2000s spurred several states to explicitly ban STOLI, the practice hasn‘t ended.
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:
A parent or other family member
Your business partner
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.
Learn more about buying life insurance on someone else
Is it legal to sell your life insurance policy?
It’s 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.
