Strangers Profiting From Your Death Benefit

Stranger-owned life insurance (STOLI) is exactly as it sounds – life insurance originated by a stranger. The original intent of STOLI is to eventually change ownership of a life insurance policy – typically to an investor – and profit from a death benefit.

Please note that the STOLI has been banned in at least 25 states, and the majority of the remaining states are considering banning it.

So, what are the impacts on life insurance companies because of stranger-owned life insurance?

There is some debate as to what the bottom-line impact will be to life insurance companies.

There will be some impact due to the way that life insurance companies price their policies. The pricing of a life insurance policy is dependent upon a number of actuarial-based assumptions, one of which is expected lapse rates.

A majority of life insurance policies in-force today were sold and priced, prior to the secondary life insurance marketplace. Therefore, when the products were designed, companies took into historical lapse rates (this includes surrenders).

Lapse rates impact the premiums since insurance companies assume that a certain number of policyholders will lapse – discontinue paying premiums – rather than retaining the policy until death.

Life insurance product pricing is a function of three pricing factors: cost of insurance costs (COIs), policy expenses, and policy interest earnings.

This is a delicate balance for companies to be both competitive and profitable.

Life settlements make estimating lapse assumptions more difficult because policyholders are opting to sell their policies rather than allowing them to lapse.

If insurers price policies based on significantly lower lapse assumptions than are realized, insurers lose.

Furthermore, the insurers cannot raise rates on guaranteed premium policies to make up the shortfall. Consequently, they could be compelled to hoard more reserves to pay claims.

This will impact profitability and could upset the delicate balance.

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.

Leave a Comment