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  • How does stranger-owned life insurance work?
  • August 9, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Stranger-owned life insurance (STOLI) is exactly as it sounds – life insurance originated by a stranger. Typically, they are initiated by a third party looking to own and control a policy from the beginning.

    Eventually, the ownership of the policy will be transferred to the third party, which is usually an investor(s). This is done so that the third party can benefit from the death of the insured.

    Please note that the practice of STOLI has been banned in almost every state.

    Here’s a basic example of a STOLI arrangement; please note there are many types:

    An agent/broker proposed to a prospective insured that they own a “wasting asset” in the form of their insurability and that consenting to be insured under a STOLI policy can monetize this.

    Stranger-owned life insurance is a shady – almost illegal – type of fraud that involves a third party gaining ownership of a life insurance policy.

    There is no traditional life insurance need and they are acquiring the life insurance strictly for monetary purposes. They are generally offered one – or a combination – of the following, if they qualify for the program:

    · An up-front cash distribution of 1.5 percent and 3 percent of the death benefit (or a free luxury car)

    · A portion of the net profits from the expected sale of the policy to a life settlement company after two years

    · In some instance, another 1.5 percent to 3 percent of the insurance benefit when the insured dies

    The insured will generally not put up any money themselves.

    The client secures a non-recourse premium-financing loan from the lender to finance a life insurance policy. The proposed insured qualifies for the issuance of a $2 million or large permanent life insurance policy.

    The third-party investor group makes or guarantees a non-recourse loan to the non-grantor irrevocable trust created to purchase the policy.

    As part of the policy purchase, the trust collaterally assigns the policy to the lender.

    After 24 months or longer, in order to satisfy both the policy’s incontestability provision and state insurance law regulating the sale of newly issued policies, the insured’s trustee chooses from the following options, if available:

    · Repay the loaned premiums with interest along with any cash advances, origination fees, termination fees, or other charges; pay all future premiums and keep the policy; or

    · Sell the policy to a life settlement company; or

    · Transfer ownership of the policy to the lender s in full satisfaction of the loan.

    This is just one example of how a STOLI transaction can happen.

    If you seek further assistance or additional information, please feel free to email me at

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

Creative Commons License
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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