Life Insurance

Stranger-Originated Life Insurance (STOLI)

Stranger-originated life insurance (STOLI) is an arrangement—generally illegal or unenforceable—in which an investor or third party who has no insurable interest arranges for life insurance to be issued on another person's life, with the intent to profit from that person's death through a pre-planned policy sale.

Last reviewed: May 2026 · Editorial methodology

Definition

Stranger-originated life insurance describes schemes in which investors induce individuals—often seniors—to apply for life insurance with the understanding that the investor will finance the premiums for two years and then purchase the policy in a life settlement transaction, circumventing the insurable interest requirement. All 50 U.S. states require that a life insurance policy be taken out with a genuine insurable interest—the owner must have a financial stake in the insured's continued life—and STOLI arrangements are designed to manufacture a temporary facade of insurable interest to obtain policies for investor speculation on human mortality. Courts in many states have voided STOLI policies and returned premiums to carriers, finding them void ab initio as wagering contracts against public policy under state insurable interest laws. The NAIC's Life Settlements Model Act and state laws specifically prohibit agreements entered at or before policy issue that require a subsequent assignment to a person lacking insurable interest. Legitimate life settlements—where a policyholder chooses to sell an unwanted existing policy years after it was genuinely purchased—are legal, regulated transactions distinct from STOLI. Agents and brokers who participate in STOLI arrangements risk license revocation, criminal prosecution, and civil liability.

Where this term matters

Life Insurance →Insurance Companies →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Contestability PeriodThe contestability period is typically the first two years of a life insurance policy during which the insurer has the right to investigate claims and deny payment—or rescind the policy—if the application contained material misrepresentations, fraud, or omissions.Incontestability ClauseThe incontestability clause is a standard life insurance provision that bars the insurer from contesting the validity of a policy—or denying a claim for misrepresentation—after the policy has been in force for two years, providing security to policyholders and beneficiaries.BeneficiaryThe person, entity, or trust designated to receive the death benefit of a life insurance policy.Irrevocable BeneficiaryAn irrevocable beneficiary designation gives the named beneficiary a vested interest in the life insurance policy, meaning the policyholder cannot change the beneficiary, take a policy loan, surrender the policy, or make other material changes without the irrevocable beneficiary's written agreement.Key Person InsuranceKey person insurance—also called key man insurance—is a life insurance policy owned by a business entity on the life of an individual whose death would cause significant financial loss to the company, with the business named as beneficiary to offset recruitment costs, lost revenue, or loan repayment obligations.

Related guides

Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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