Stranger-Owned Life Insurance (STOLI)

Unlocking the Intricacies of Stranger-Owned Life Insurance (STOLI)

Understanding the Unorthodox Realm of STOLI

Stranger-owned life insurance, often abbreviated as STOLI, delves into the unconventional world of life insurance arrangements. Unlike traditional policies, STOLI involves an investor holding a life insurance policy without possessing an insurable interest in the insured. This departure from the norm raises ethical and legal concerns, challenging the fundamental principles of life insurance.

Exploring the Concept of STOLI

STOLI, also known as stranger-originated life insurance, serves as a loophole to circumvent the insurable-interest requirement inherent in life insurance purchases. Typically, to secure a life insurance policy legally, the purchaser must demonstrate an insurable interest in the insured individual. This means that the death of the insured would impact the financial well-being of the policyholder. Insurable interest often involves familial or financial ties between the purchaser and the insured, such as those existing between spouses or parents and children.

Key Takeaways on STOLI

Stranger-Owned Life Insurance policies are owned by third parties, usually investors, who lack an insurable interest.
STOLI policies are frequently offered in exchange for loans that the insured can utilize during their lifetime.
STOLI arrangements are deemed illegal as they provide the policyholder, who lacks an insurable interest or relationship with the insured, an advantage upon the insured's death.

STOLI arrangements often entail deceptive financial practices, with seniors using exaggerated financial data to obtain disproportionately large life insurance policies. These policies are then transferred to third-party lenders in exchange for cash payments, resulting in an advantageous situation for the involved parties.

Criticism of STOLI

The absence of an insurable interest renders STOLI morally dubious. Unlike traditional policies where the policyholder typically wishes for the insured's longevity, STOLI incentivizes a premature demise to expedite the collection of the death benefit, benefiting the third party.

Corporate-owned life insurance (COLI), while legal and ethically sound with an insurable interest, may still evoke discomfort. Historical incidents, such as the case of H. H. Holmes purchasing life insurance policies on his employees before murdering them, underscore the importance of stringent regulations and consent from the insured.

Special Considerations