How Does Stranger-Owned Life Insurance Work?

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.

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

Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit to join the GET READY! Financial Preparedness Club and access free resources.

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