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What is Stranger Originated Life Insurance and why is it Illegal in Some States?

Stranger originated life insurance policies, or STOLI policies, have been in the news lately, leading many senior citizens and life insurance policy holders to wonder what it is and why it’s illegal in some states.

Stranger originated life insurance is a type of insurance arrangement in which a person you don’t know very well (the “stranger”) can take out a policy on your life.

Why would a stranger do that? Well in some cases investors in business ventures will take out a STOLI policy in order to secure their financial future should a particular business partner die.

In other cases someone will actually take out a STOLI policy with the hope of reselling it to an investor with the intent of making a large sum of money when the insured person dies. This is illegal in some states.

In almost every case, the person insured by the STOLI is a senior citizen or elderly. Often the person who is to be insured will cooperate by allowing medical records to be released, or by undergoing a medical exam, and they are usually compensated for their cooperation with cash.

So why is a stranger originated life insurance policy considered ethically questionable?

Well, for starters many lawmakers have argued that in these cases the person holding the insurance policy is financially invested in the death of the insured person, not in their life, health, or well being. There have been cases in which the death of a senior citizen sparked concern when a STOLI policy later surfaced and provided death benefits to people who weren’t immediately related to or associated with the deceased.

Also, in some cases, fraud has been discovered in the sale of STOLI policies. In one case, a California life insurance agent misrepresented a Cleveland woman’s financial assets and physical location so he could benefit financially when she died. This scam would have cost the insurance company millions of dollars.

And while the insurance agent stood to gain millions, he only paid the woman who was subject to the insurance policy around $8,000 dollars. He likely misrepresented what he was doing, and she was not aware of the scam.

Seniors who are approached by someone they don’t know very well who wants to sell them a life insurance policy should be very careful. This is doubly important if an insurance broker wants to sell your policy to someone else.

Stranger originated life insurance policies have a specific use, particularly in the world of business ventures and investing, but for most people a STOLI policy just isn’t necessary.