Fact Sheet: Stranger-Originated Life Insurance (STOLI)

The Florida Insurance Council and American Council for Life Insurance are proposing to the Florida Legislature a package that would help deter a growing but abusive practice called stranger-originated life insurance (STOLI). Under these contrived arrangements, the good, social purpose upon which life insurance is based—financial protection for families and businesses—is turned on its head.

In STOLI schemes, investors entice seniors to take out policies and then profit when they die. The sooner they die, the greater the profit. In effect, STOLI promotes wagering on human life. Also, STOLI threatens to expose consumers to unexpected taxes, loss of privacy, and inability to obtain life insurance in the future.

How STOLI Works
  • Investors, such as hedge funds, induce senior citizens to purchase life insurance. The seniors purchase the policies in their own names but agree to an arrangement where the investors, after the expiration of a two-year contestability period, stand to profit from the insured’s death.
  • The seniors usually receive an upfront payment and the investors agree to finance the premiums.
  • The investors typically profit by collecting the death benefits after the seniors die. The sooner the seniors die, the higher the profit.

Risks to Consumers
  • Senior citizens participating in these arrangements may not be aware that the income is generally taxable and they may receive substantially less than expected.
  • The seniors may not be aware the life insurance policies may be far more valuable to them as estate protection rather than as a scheme for making a quick buck.
  • The seniors participating in STOLI may use up their insurance capacity and be unable to purchase—and unaware of their ability to purchase—life insurance in the future for estate planning and other legitimate needs.

Wagering on Human Life
  • Life insurance is designed to help families and businesses cope financially following the unexpected death of a loved one, a business owner, or a key employee. Beneficiaries have an interest in insureds’ continued lives, not their early demise. With STOLI schemes, investors are betting the early demise of an insured will lead to a profitable payday.
  • Our nation decided long ago to prohibit the wagering on human life, which is exactly what STOLI represents.