- What do I need to know about stranger-owned life insurance?
- August 9, 2013
Stranger-owned life insurance (STOLI) is the most recent attempt to twist life insurance into a speculative financial instrument to take advantage of the unique tax features of life insurance (i.e., income tax-free death benefits and cash value accumulation).
Please note that the practice of STOLI has been banned in almost every state. Both the National Association of Insurance Commissioners (NAIC) and National Conference of Insurance Legislators (NCOLI) have adopted model acts for doing so.
However, since STOLI is still allowed in some states (or recently was), this is still an important issue to understand.
Using life insurance as a commodity to speculate in human lives threatens the survival of life insurance companies.
The difference between STOLI and life settlements is that life settlements are supposedly for purchasing in-force policies that were purchased when there was a “real” insurable need, which no longer exists.
Conversely, STOLI involves no “real’ insurable needs, which can also go by other names, including Investor Initiated Life Insurance (IILI), SOLI, and SPINLIFE.
This concept includes the bribing of wealthy, elderly individuals to apply for large policies destined for purchase by investors. Basically, the insured is provided with life insurance for two years with no out-of-pocket cost –“free insurance”.
These prospective insureds, generally between age 72 and 85 with a net worth of at least $5 million, are approached with the concept that they “own” an asset in the form of their insurability and that they can monetize this wasting asset by consenting to be insured under a STOLI policy.
This concept of selling an individual’s unused insurance capacity through a structured life settlement may appear advantageous to all parties involved.
However, combining the use premium financing with the future planned life settlements may be contrary to one of the basic principles upon which the insurance industry is founded, which is the insurable-interest doctrine.
STOLI is not a type of life insurance product; it is a particular use of a life insurance policy, such as a key person, buy-sell, etc. However, it is a potentially “malignant” concept and is un-established in many areas.
The concept combines the premium-financed purchase of life insurance contract with the future sales of that contract in a life settlement.
The parties to a STOLI transaction:
· Insured – person whose life insurance is on
· Life insurance agent/broker – person who “sells” the life insurance
· Life Insurance Company
· Investor group – the viator or life settlement market maker
· Special purpose lender
· Internal Revenue Service – possibly depending on how the policies are set up and the future interpretation of these types of policies
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.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.