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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. In other words, someone who wouldn’t suffer financially due to your passing owns and stands to benefit from a policy taken out on you.
It’s illegal to participate in a STOLI 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, often an investor, not associated with the insured owns and pays the premiums for STOLI
The insured sometimes 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 whose death would impact you financially
In a stranger-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. STOLI policies are sometimes called investor-owned life insurance (IOLI).
These third parties historically target seniors who are healthy enough to outlive their policy’s contestability period—thus decreasing the potential for a death claim investigation—and collect the insurance proceeds after that person passes away.
Some individuals bring insurance agents or the insured person themselves into the scheme, enticing agents to sell fraudulent policies with the promise of high commissions and offering the insured an upfront payment for their cooperation.
Stranger-owned life insurance has a lengthy history dating back to the 1700s or earlier, when individuals would take out policies on someone they knew to be in poor health to reap the benefits. With limited 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 US Supreme Court deemed a life insurance policy taken out without an insurable interest illegal. Numerous legal cases in the early 2000s spurred several states to explicitly ban STOLI, but fraudsters persisted.
It’s unlikely that the average person will find themselves involved in STOLI, but 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 an insurable interest in that person and have their explicit permission and participation in underwriting for the policy to go in force.
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It is technically legal to sell your life insurance policy, a transaction known as a viatical settlement or life settlement, though insurance professionals frown on the practice. 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 incurs taxes and fees.
Stranger-owned life insurance policies are rare due to improved 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.
Stranger-owned or stranger-originated life insurance is a policy taken out by a third party on someone in whom they have no insurable interest. The practice is illegal.
You can buy life insurance on someone whose death would cause you financial hardship, such as a spouse, family member, or business partner, with their permission.
STOLI and investor-owned life insurance (IOLI) are the same illegal practice, but IOLI is sometimes used to specify that the policy owner is an investor.
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