A stranger originated life insurance (STOLI) is one which is taken out by a person who has no relationship to the insured. Such type of insurance has drawn criticism since it provides the opportunity for murder. Such type of insurance is also used as an investment technique whereby the person who takes out life insurance on another pays the premiums and in case of the insured persons death, collects the death benefit.

• STOLI is a type of insurance product that goes against the ethics of life insurance which is supposed to provide financial support to beneficiaries in case of the insured person’s death. This means that life insurance ought to be much more personal in nature and not a product that can be wielded to exploit people who have no other alternative for earning a steady income. This is especially true of elderly people who are approached by investors who take out life insurance on the elderly person who can become the hapless victim of murder by the hands of the “investors”.
• STOLI may sound a little shady in nature but if there is good faith present in the contract on the part of all the parties involved then it can be a good option for senior citizens. For instance John Doe is approached by an investor who pays the premiums ($400,000 annually) for a policy worth $6 million. Now if John Doe dies then $6 million would be payable to the family of John out of which a sum equivalent to the amount of all the premiums plus the interest is paid to the investor by the family. The rest of the money is kept by the family or dependents.
• If in a STOLI the insured person outlives the term of the policy then he has the option of selling the policy to another investor for a lesser amount. In the above example, if John Doe survives then he can sell the policy to another investor for $2 million. Out of this $ 2 million he can pay the first investor and the premiums are now paid by the second investor. This means that the first investor is now out of the contract and absolved.
• If at some point in time if John Doe dies then the second investor would receive the $6 million out of which $2 million and the money paid to the first investor is deducted. This means that if John Doe dies a year after the second investor came into picture and three years after the policy kicked in then the second investor would get $6 million minus $800,000 ($400,000+$400,000 as premiums paid by first investor) minus the $2 million paid to the insured. Which means $3.2 million would be pocketed by the second investor and the family would be left with nothing if the $2 million paid by the second investor is exhausted.
• This type of insurance is only advisable when a person is in dire need of money and doesn’t suffer any critical illness. However elderly people who have no dependents and have little money can opt or agree to such insurance contracts. The only thing to be kept in mind is that the investor should be ethical and moral in order for this policy to benefit all the parties involved in the contract.
• There are other alternatives to STOLI such as reverse mortgage which is good for single elderly people who have no dependents. In a reverse mortgage the house can be given as collateral for a loan from a bank and upon the death of the resident, the bank sells the house and pockets the profits. STOLI should only be chosen when there are no opportunities for a gainful employment due to old age or retirement.
• A similar form of insurance is corporate owned life insurance in which the employer takes out insurance on the employee and pockets a part of the death benefit if the insured dies. This type of insurance was also criticized by many because corporations took out life insurance on people who fall in the low income group. Sometimes the family and even the insured person did not know that such insurance had been taken out by the corporation.
• The decision of whether or not to opt for a STOLI lies with the person who wants to get insured. However, if there are any dependents or relatives who require financial support and are not able to pay the premiums and neither is the person who wants to be insured then Stranger originated life insurance can save the day and give you some peace of mind and a little extra cash to support the dependents for a short period of time.

If you have any additional points or facts about STOLI please feel free to leave a comment.