STOLI stands for Stranger Originated Life Insurance. STOLI life insurance transactions are generally looked upon as a life insurance scam promoted by insurance investors. Many states are making laws prohibiting STOLI transactions or in the process of making laws to prohibit STOLI transactions because the states feel it is a life insurance scam promoted by greedy insurance investors.
STOLI policies are life insurance policies where an insurance investor has their client (usually an elderly person) put their name as the beneficiary on the life insurance policy even though the insurance investor has no insurable interest in their client. This means that the insurance investor is not a relative and is only making the STOLI transaction in order to make money off of the insured person after they die. STOLI transactions are marketed towards the elderly, especially the elderly who may not live much longer.
States are increasingly banning STOLI transactions for many reasons. First, elderly who probably don't need life insurance are being pressured into purchasing these policies and putting the insurance investors down as the beneficiaries. The elderly may be "wined and dined" by the insurance investor and told that they can get a cash bonus by making the STOLI transaction. Unfortunately, seniors are often times unaware that they have to pay taxes on the cash bonus and could be charged with theft by agreeing to the transaction. Also, STOLI transactions may make it harder for seniors from getting other life insurance in the future. In addition, STOLI policies can be bought and sold to more than one person so many insurance investors are, in a sense, wagering on someone's death.
