DEFINITION of 'Stranger-Owned Life Insurance - STOLI'
Insurance that is purchased with the intent of eventually transferring ownership to a third party, usually investors. Stranger-owned life insurance (STOLI) is generally described as the purchase and subsequent sale of a newly issued life insurance policy to an investor or group of investors who have no insurable interest in the person being insured. In other words, the policy enables investors to profit from the death of the insured.
BREAKING DOWN 'Stranger-Owned Life Insurance - STOLI'
There are a couple of ways investors attempt to profit from stranger-owned life insurance. In most instances, the investors can wait for the insured to die and simply collect the payout. Or, if the group of investors is large enough and they have invested in several life insurance contracts, these can be bundled and traded or sold to other investors who are looking to invest in similar investments.
Insurance companies argue that such policies are manufactured and overstate insurable interest at best. Many of the more obvious STOLI loopholes have been closed and insurers themselves are becoming more vigilant.