Stranger Originated Life Insurance (STOLI)

• What it is: Stranger originated life insurance (STOLI) is when investors persuade someone to purchase life insurance so they can profit from the death benefit.
• Why it matters: These deals are banned in most states and can void your policy if discovered.
• Risks: Individuals involved may face lawsuits, tax penalties, and difficulty buying legitimate life insurance in the future.
• How to protect yourself: Watch for offers of “free” or “no-cost” life insurance, or strangers encouraging you to apply for coverage.

Life insurance is designed to provide financial protection for your family if you die. Most people purchase a policy for themselves, where they are the insured person and the policyholder.

Insurable Interest

In order to buy a life insurance policy for someone else, you need to demonstrate that you have an insurable interest in them. This means you would suffer financially or face some other hardship by their death.For example, family members have insurable interest in each other. A husband may buy coverage for his wife, or a parent could purchase coverage for their child. Or, a small business owner may set up life insurance for her business partner. 

How STOLI Breaks the Rules

Stranger originated life insurance (STOLI) happens when investors or third parties encourage someone to buy a policy they don’t actually need. Instead of protecting family or income, the policy is meant to pay strangers a profit when the insured person dies. These arrangements put both the buyer and insurer at risk.

Stranger originated life insurance became more common in the early 2000s, building off the growth of the life settlement industry. Life settlements are legitimate transactions where a policyholder sells an unwanted policy to a third party for cash. STOLI arrangements tried to mimic that process by encouraging senior citizens, often with limited income, to take out brand-new policies they didn’t need, with the understanding that investors would eventually take ownership.

How States Responded

At first, these programs were marketed as “win-win” deals: seniors received “free” insurance or upfront payments, while investors stood to gain from the eventual death benefit. But regulators and insurers quickly saw the problems with the lack of insurable interest, misrepresentation on applications, and policies being treated as investment vehicles. By the late 2000s, most states had outlawed STOLI contracts, with strict penalties for those who promote or participate in them.

Read: Can You Get Life Insurance with a Pre-Existing Condition?

How Life Settlements Differ From STOLI Transactions

Life settlements, also called viaticals, involve selling an existing life insurance policy to a third party for cash. These transactions are legal when done properly, as the policy was originally purchased with a valid insurable interest typically to protect family or business needs. If the coverage is no longer needed or affordable, the policy owner can choose to sell it. The cash received is typically less than the policy’s face value (or death benefit), but more than the policy’s surrender value.

STOLI, on the other hand, skips the legitimate purpose. The policy is taken out from the start with investors in mind, not to protect a family or a business. That lack of insurable interest makes it fraudulent, even if the structure looks similar to a life settlement.

These types of policies often target older adults, especially those with limited income or assets. The pitch may sound like a good deal: take out a life insurance policy, and a third party promises to cover the premiums. STOLIs are marketed as “zero premium life insurance,” and “no cost life insurance.” In return, the investor gains control of the policy and eventually collects the death benefit.

The setup typically involves misrepresenting information on the application, like claiming the policyholder intends to keep the coverage for personal use. After a short waiting period, the policy is transferred to investors. This turns life insurance into a speculative investment, which is exactly what regulators have banned.

These arrangements are unethical. If you have a legitimate insurable interest in someone's life, you want that person to live a long life rather than die quickly so you can collect the benefit payout. Without the insurable interest, the policyholder (the person or group who originated the STOLI) has more interest in the insured dying as soon as possible.

No. STOLI arrangements are banned in nearly every state because they violate the principle of insurable interest. Life insurance is meant to protect families or businesses, not to serve as an investment tool for strangers.

In 2007, the National Association of Insurance Commissioners (NAIC) adopted model laws to curb STOLI schemes. States soon followed with their own legislation. Participating in a STOLI arrangement can create serious problems for the insured person. What may look like “free” life insurance can quickly turn into lasting financial and legal trouble.

Financial and Legal Liability:

If an insurer discovers the policy is STOLI, it can be declared void. That means no payout for beneficiaries and possible lawsuits for fraud or misrepresentation. Some participants have also faced tax penalties or court orders to return money received from investors.

Read: Evidence of Insurability in Life Insurance

Loss of Privacy:    

These programs typically require detailed access to your medical records, since the investors’ profit depends on your life expectancy. This loss of privacy can feel invasive, and your personal health information will likely be shared with multiple third parties you don’t know.

Inability to Obtain Legitimate Insurance:

A STOLI policy on your record can make it harder to buy legitimate coverage later. If life insurance companies believe you participated in a fraudulent arrangement, they may deny applications or charge much higher premiums, leaving you without affordable protection when you need it most.

STOLI arrangements are often disguised as financial opportunities, but a few red flags can help you recognize them quickly. Be cautious if you’re approached with:

• Promises of “free” or “no-cost” life insurance – if it sounds too good to be true, it’s probably a scam.
• Strangers or investors offering to pay your premiums.
• Pressure to buy life insurance you don’t actually need.
• Requests to sign policy documents you don’t fully understand.
• Offers that include cash incentives in exchange for applying.

If any of these situations come up, it’s best to walk away and report the approach to your state insurance department.

Stranger originated life insurance offers can look appealing on the surface, but they carry serious financial and legal risks. If you’re ever approached with an offer that sounds too good to be true, it probably is. Always work with trusted professionals and check with your state’s insurance department if you’re unsure.

To learn more about how life insurance works in legitimate settings, visit our Life Insurance Basics resource.