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What is Stranger Originated Life Insurance (STOLI)?

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The old phrase “stranger danger” takes on new meaning when you’re talking about life insurance. The danger lies in an illegal practice called Stranger Originated Life Insurance or STOLI.

As with many areas of personal finance, life insurance is a complex industry with its own language and terminology. Confusion around terms like STOLI is natural. The problem is that misunderstanding STOLI can have serious legal or financial consequences. STOLI is prohibited by state insurance law. If you inadvertently get involved in a STOLI policy, you could get wrapped up in a criminal lawsuit. On the other hand, if you incorrectly associate STOLI with life settlements, you might part with your unwanted life insurance for less than it’s worth.

Learning more about STOLI empowers you to protect yourself from insurance scams. It may also clarify how you can legally sell your life insurance for top dollar. Read on for a full review of what STOLI is and what it isn’t.


Stranger Originated Life Insurance (STOLI) Definition

All life insurance policies have a policyowner and an insured. These are often — but not always — the same person. When they’re not the same person, there is a legal requirement that the policyholder has an “insurable interest” in the insured. This means the policyholder must benefit financially from the ongoing health and wellbeing of the insured.

STOLI is a life insurance policy that’s initiated without the presence of insurable interest between the policyholder and the insured. This is an illegal practice; state law often interprets STOLI as human life wagering.

As an example, you cannot legally buy life insurance on your mom’s elderly neighbor when you have no stake in the neighbor’s continued longevity. You face no negative consequences and have no risk of loss associated with the neighbor’s death. In this scenario, you cannot legally gain from the neighbor’s passing.

On the other hand, you could buy life insurance on your spouse who is the breadwinner of your household. Insurable interest exists in that case because you benefit financially from your spouse’s continued ability to work. You are therefore qualified to benefit financially from your spouse’s passing.

STOLI may also be called SOLI or investor-originated life insurance.


How Does Stranger Originated Life Insurance Work?

STOLI arises because someone is looking to gain financially on the death of a senior. It can come about with or without the senior’s knowledge. An individual, for example, might offer to pay the senior a few thousand dollars to cooperate with the insurance application and medical exam. That individual would then agree to fund all policy premiums.

The scam can end two ways. The individual can wait and collect the death benefit or sell the policy for cash to a third-party investor.

Even with the senior’s cooperation, that life insurance policy is invalid. The insured senior gets only a fraction of the policy’s value, while the individual who funds the premiums and any others investors come away with a much larger financial gain.

In other situations, the senior might not even know a policy has been issued. The California Department of Insurance, for example, has uncovered scams that pay seniors to take “longevity surveys.” These surveys collect medical information which the scammers use later to purchase life insurance on the unsuspecting seniors.


Who Benefits From Stranger Originated Life Insurance?

Ultimately, the recipient of the death benefit is the one who profits most from STOLI. This could be an investor group or an individual.

A New Jersey case documents how investors planned to benefit from STOLI. The policy in question was $5 million in coverage on a woman named Nancy Bergman. A trust in Bergman’s name owned the policy and Bergman’s grandson was the trust beneficiary. Investors with no personal connection to the insured funded the policy premiums. In 2019, the New Jersey Supreme Court ruled that the policy was STOLI. As such, it violated the state’s insurable interest statute, the state constitution, anti-gambling laws, as well as public policy against gambling.

In 2016, a federal judge found an individual named Daniel E. Carpenter guilty on charges including conspiracy, mail fraud, wire fraud, and money laundering for his individual role in a STOLI scam. Carpenter and another man fraudulently applied for and obtained life insurance policies on seniors, with the goal of collecting the death benefits later. As the verdict explains, “A STOLI policy differs from a regular policy in that it is not obtained for estate planning purposes but for transfer to an investor with no insurable interest in the life of the insured.”


Is Stranger Originated Life Insurance Legal?

STOLI is not legal. The legality hinges on the presence of insurable interest at the policy’s origination. If there’s no insurable interest between policyholder and insured when the policy is issued, the policy is invalid. The policyholder has probably committed fraud and illegal wagering.


How to Avoid Stranger Originated Life Insurance Schemes

STOLI scammers do have different tactics for targeting seniors. They can do it by tricking you into providing your medical information on a fake “survey.” Or, they might ask you directly to apply for life insurance on their behalf. There are even unscrupulous insurance agents who will skim your information from other policies to apply for new coverage.

Be wary of handing over your medical information in a way that’s personally identifiable. An anonymous survey might not be problematic, but you don’t want to give any unknown individual your name, date of birth, Social Security number, and health record. That’s enough information to complete a life insurance application. You should also deeply trust your insurance agent who already has access to your personal information.

Also watch out for anyone who offers you compensation to apply for life insurance. No valid life insurance policy gives you a bonus for completing an application. As well, there’s no such thing as life insurance without premiums. If you complete a life insurance application for someone who says there are no premiums, it’s very likely fraud.


Life Settlements Are Legal, STOLI Is Not

Life settlements and STOLI can be confused with one another, but they are very different. A life settlement is the legal transfer of a valid life insurance policy from its owner to a third-party investor. STOLI is specifically a new policy that is initiated with the intent of financial gain where there is no insurable interest.

Understanding this distinction is important. A life settlement is a valid, regulated financial transaction that can help you maximize the value of your life insurance. As quoted from the California Department of Insurance, “Life settlements can be a favorable option for a senior to access the death benefit of a policy for which he or she no longer has a good economic need to keep in force.”

Reach out to Harbor Life Settlements to learn more about life settlements and to get a free estimate on the market value of your life insurance.

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Catherine Brock

Catherine Brock

Catherine Brock is a personal finance writer who's been featured in The Motley Fool, Refinery29, and has made appearances on ABC7 Chicago, FOX2News St. Louis, KCAL9 Los Angeles, Fox19 Cincinnati, WGN TV Chicago and WCPO TV Cincinnati. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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