Stranger-owned life insurance (STOLI) is illegal and not a life settlement. STOLI transactions became illegal in the U.S. in 2010 with help from the National Association of Insurance Commissioners (NAIC). The sales were made illegal due to their lack of insurable interest
Insurable interest is defined as a beneficiary having legitimate financial loss due to the death of the life insurance policyholder. The NAIC closely regulates life settlements to minimize consumer’s risk because they are between strangers. Thus making them vulnerable to fraud.
In a STOLI transaction, agents look to buy life insurance policies of healthy people to buy their life insurance policies. In a life settlement, the policyholder is terminally ill and will receive much-needed funds for medical bills or bucket-list item. It is this reasoning that constitutes the insurable interest in a life settlement and the lack of it in a STOLI sale.
Some argue the life insurance policy is the property of the policyholder and should be free to sell it if they choose. However, the NAIC’s insurance consumer advocate group says otherwise. They deem that a third-party sale of life insurance is agreeable when someone is terminally ill but if healthy it places risk to their life. The stranger buying the life insurance policy wants to profit sooner rather than later and opens up inducement for criminal behavior.
STOLI transactions were finally made illegal in July of 2010 based on the lack of insurable interest. They do, however, still occur and not yet illegal in some other countries.