What Is Stranger-Owned Life Insurance?

Stranger-owned life insurance (STOLI) is a policy someone (usually an investor) buys on another person with whom they don't have an existing relationship. The purchaser is buying life insurance as an investment rather than because they would suffer from the other person's death. Because of this uncomfortable arrangement, STOLI policies are generally illegal.

Understanding Stranger-O🤡wned Life Insurance (STOLI)

Life insurance is a financial product that pays out a lump-sum death benefit when the insured dies. In order to buy life insurance on somebody else, you need to prove that you have an 澳洲幸运5开奖号码历史查询:insurable interest in their lives. This means you would suffer financially or face some other hardship by their death.

Family members have insurable interest in each other. One spouse could buy coverage on another or a parent could buy 澳洲幸运5开奖号码历史查询:life insurance on their child. A business🌊 owner also has insurable interest in the life of key employওees.

Stranger-owned life insurance (STOLI), also known as investor-owned life insurance (IOLI) or stranger-originated life insurance, tries to bypass the insurable-interest requirement of purchasing life insurance. Put differently, it's buying life insurance on somebody whose death would not create a loss otherwise for the buyer.

STOLI arrangements are broadly illegal, and many schemes include fraudulent financial reporting. For example, a se🐭nior citizen uses falsely exaggerated financial numbers to purchase an extremely large life insurance policy. In exchange, a third-party investor agrees to cover the premiums.

Eventually, the senior citizen purchaser sells the policy to the investor for a cash payment. The insured gets “free” money. The third-party lender gets a large life insur🍸ance policy that pays a tax-free ben♑efit when the insured dies.

What Constitutes a Stranger-Owned Life Insurance Arra💛ngement?

The primary feature of a STOLI arrangement is that the insurance policy is purchased entirely as a speculative investment by one or more strangers, rather than as a way to provide financial support for the insured's beneficiaries or loved ones.

STOLI arrangements are illegal today, with many states enacting laws specifically outlawing the practice. Previously, however, they were sometimes marketed to older individuals under the guise of "zero premium life insurance," "estate maximization plans," or "no cost to the insured plans.

Viaticals

STOLIs are different from life settlements (澳洲幸运5开奖号码历史查询:viaticals). Under a viatical, a person who already owns life insurance on themselves agrees to sell their policy to a third-party, once again usually a group of investors. The investors in a viatical settlement pay all future premiums left on the life insurance policy and become the sole beneficiary of the policy when the insured dies.

Viaticals are often marketed to policy owners without any heirs or who have a terminal illness and could use the immediate cash. These arrangements are legal in the United States but illegal throughout most of Canada.

Criticism of Stranger-Owned Life Insurance

STOLIs create an unethical situation. If the policy owner has insurable interest in someone's life, chances are they care more about that person living a long life rather than dying sooner for the 澳洲幸运5开奖号码历史查询:death benefit. Without t♛he insurable interest, the policyh♊older has more interest in the insured dying as soon as possible.

Having insurable interest keeps 澳洲幸运5开奖号码历史查询:corporate-owned life insurance (꧑COLI) legal and, to some, ethical. The financial value of the employee/insured to the company gives the employer interest in the insured’s continued health and well-being.

Even a company-owned policy, broadly legal and widely used, may give employees uneasy feelings. H. H. Holmes, a nineteenth-century businessman and the first noted U.S. serial killer, famously purchased life insurance policies on his employees before murdering them. That’s why the issuance of life insurance is subject to several requirements, usually including the consent of the insured. Someone cannot buy insurance on your life without you signing off in agreement.

Stranger Originated Life Insuran꧅ce Arrangement Regulat🧸ion

STOLI arrangements are not legal. The National Association o🧸f Insurance Commis⛦sioners (NAIC) proposed sample legislation in 2007 for states to consider adopting to ban these policies (since insurance is regulated state-by-state in the U.S.). To date, most states have adopted STOLI-related laws—with laws that closely track the NAIC recommendations.

Several states also have provisions that can retroactively cancel existing life insurance policies if they are revealed to be STOLIs after the fact due to a lack of insurable interest.

Special Considerations

A common workaround of the i💖nsurable-interest requirement is to artificially create it. An investor who wants to take out a life insurance policy on a stranger ma🐷y manufacture insurable interest instantly by granting that stranger a loan. The stranger’s death would leave the loan unrepaid, creating a financial loss and fulfilling the most skeletal definition of insurable interest.

Despite the 澳洲幸运5开奖号码历史查询:Internal Revenue Service and state govern♛ments having a distaste for STOLI, as well as insur🍷ance companies’ increasing vigilance, this practice persists.

The Bottom Line

It is only legal and ethical to take out a life insurance policy on somebody with whom you have a valid insurable interest, like a family member or business partner. STOLI policies based on the life of a stranger are illegal because there is no insurable interest. The government doesn't allow investors to profit off the lives of others.