Stranger originated life insurance is frequently pitched as a way for older individuals to get a tax-free payout. The arrangement may be called an “estate maximization plan,” a “no cost to the insured plan,” a “zero premium life insurance policy,” or a “new issue life settlement.” Whatever it is called, it requires committing insurance fraud.

If someone approaches you with a life insurance scheme that sounds like this, beware – STOLIs are for the most part illegal. And if you believed you should have been a beneficiary to a life insurance policy and some stranger was named instead, give the life insurance lawyers at Boonswang Law a call. We have helped clients nationwide get the payout they are due.

What Stranger Originated Life Insurance Is

Also called Stranger Owned Life Insurance or STOLI for short, Stranger Originated Life Insurance is a situation in which someone who does not have an insurable interest in the insured pays premiums on a life insurance policy in the name of the insured and is the policy’s beneficiary.

The Purpose of Stranger-Owned Life Insurance

The purpose of STOLIs is to get a tax-free payout. A third party may approach an insurable person and encourage them to apply for more life insurance coverage than their age, earning power, and assets would normally justify. That third party would then pay the premiums. The insured puts the policy into a trust once the contestability period expires and sells it to that third party for a “free” cash payment. That third party then gets a tax-free payout when the insured dies.

This sounds like win-win – the insured and the third party both get a tax-free payout. The losers are the IRS and the life insurance companies. While you may not have much sympathy for these entities, STOLIs contribute to higher taxes and higher premiums for the rest of us.

Is Stranger Originated Life Insurance Legal?

STOLIs are generally illegal but where they are not, they are at the very least unethical. Most are merely schemes to gain tax free money through fraudulent financial reporting.  Forging a signature on a life insurance policy is always illegal.

A third party can create an insurable interest in someone by loaning them money. If the insured died they would leave the loan unpaid, creating an insurable interest.

When Someone Can Take Out a Life Insurance Policy on Someone Else

Policy Owners Must Have an Insurable Interest in the Insured

Legally, someone must have an “insurable interest” in the insured in order to purchase a life insurance policy in their name and name themselves as beneficiary. 

The purchaser of a life insurance policy has an “insurable interest” in the insured when their finances would be adversely affected by the death of the insured. Some states set forth who has an insurable interest in the insured, such as a loving relationship, i.e., spouse, children, parents, or siblings.

The insurable interest requirement ensures that the policy owner/beneficiary has more than a financial interest in the insured. Presumably, someone in a loving relationship with the insured would hope for their long life as well as a death benefit when they die, not just their death so that they can get their payout.

An Employer May Have an Insurable Interest in an Employee

A corporation with an insurable interest in the insured may also own a life insurance policy in the insured’s name, called a corporate-owned life insurance (COLI) policy. COLIs generally require the consent of the insured.

For example, a company may insure a highly-experienced and valued employee so that they have the funds to hire a comparable replacement should that employee die. The insurable interest is the company’s interest in keeping that employee alive and working for them. 

Talk With an Experienced Life Insurance Lawyer

If you thought you were the beneficiary to a loved one’s life insurance policy but a stranger was named instead, call us. You may not get the death benefit after all if the insured committed insurance fraud, but if a stranger took advantage of the insured you may still get paid. 

We take cases on contingency only to minimize out-of-pocket expenses to you. Call us to discuss your case, free of charge!