Stranger-Owned Life Insurance, STOLI, a Speculative Financial Instrument

The most recent attempt to twist life insurance into a speculative financial instrument and take advantage of the unique tax features of life insurance (i.e., income tax-free death benefits and cash value accumulation), is stranger-owned life insurance (STOLI).

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

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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