Stranger originated life insurance (STOLI) policies are highly controversial arrangements that raise serious legal and ethical questions. At their core, these policies allow third-party investors to profit from the death of someone with whom they have no personal or financial relationship. Many states have moved to ban or strictly regulate STOLI transactions due to concerns about fraud, exploitation, and violations of long-established legal doctrines.
If you've encountered a denied life insurance claim involving a STOLI policy—or suspect a policy might be considered one—this article explains what you need to know.
What Is a STOLI Policy?
A STOLI policy is a life insurance policy initiated by a third-party investor who has no insurable interest in the insured person’s life. These arrangements typically work like this:
An individual, often a senior citizen, agrees to apply for a large life insurance policy.
A third-party investor (or group of investors) finances the premiums.
After a set period—often two years to avoid contestability issues—the policy ownership and beneficiary designation are transferred to the investor.
Upon the insured’s death, the investor collects the death benefit.
The goal of the transaction is not to provide financial security for family members or business partners, but to create a financial windfall for someone who profits from the insured’s death. For this reason, STOLI arrangements are often compared to gambling, where the “wager” is placed on another person’s life expectancy.
Why Are STOLI Policies Controversial?
STOLI arrangements go against the fundamental purpose of life insurance—to provide peace of mind and financial support for dependents or those who suffer a loss when the insured passes away. Instead, they convert life insurance into a profit-driven investment tool for third parties.
Critics argue that STOLI policies:
Violate the insurable interest doctrine, a cornerstone of insurance law
Encourage elder exploitation, especially among vulnerable seniors offered financial incentives
Undermine the public trust in the life insurance industry
Resemble wagering contracts, which are generally void under state law
The ethical concerns surrounding STOLI arrangements have prompted lawmakers and insurance regulators to take action.
Legal Issues Involving STOLI Policies
The legality of STOLI arrangements varies by jurisdiction, but most states have taken steps to limit or outright ban the practice. Here are the most common legal issues raised by STOLI transactions:
1. Violation of the Insurable Interest Doctrine
Insurance policies require that the policyholder has an insurable interest in the insured’s life at the time the policy is issued. This means there must be a relationship—financial, familial, or business—that would suffer a loss if the insured dies. A stranger or investor with no personal stake in the insured’s life lacks insurable interest.
In a STOLI arrangement, even if the insured technically owns the policy at the outset, the intent from the beginning is to transfer ownership to someone without insurable interest. Courts have increasingly recognized this “intent-to-transfer” arrangement as a violation of public policy and grounds to void the policy.
2. State Laws Prohibiting Wagering on Human Life
Many states classify STOLI arrangements as wagering contracts—essentially bets on a person’s death. Such contracts are generally void under laws that prohibit gambling on human life. When courts interpret a STOLI policy as a wager rather than a legitimate insurance contract, they often declare it unenforceable.
3. Fraud and Misrepresentation
STOLI arrangements often involve misstatements on life insurance applications. The insured may be coached to misrepresent their intent for purchasing the policy, their financial status, or whether a third party is financing the premiums. These misrepresentations, if discovered, may lead to a rescission of the policy or outright denial of benefits.
4. Elder Financial Exploitation
In many STOLI cases, the insured is a senior citizen who may be lured into the arrangement with promises of free life insurance, cash payments, or investment opportunities. Regulators have warned that these transactions can constitute elder abuse, particularly when the insured doesn’t fully understand the consequences of signing over a multimillion-dollar death benefit.
Real Case: $5,000,000 STOLI Claim Resolved
Our firm recently resolved a major case involving a $5 million STOLI policy denial. The insurer argued that the policy was part of an illegal STOLI scheme and refused to pay the beneficiary. After a detailed legal review, aggressive negotiation, and leveraging recent state-level case law, our attorneys secured a full payout for the rightful claimant.
This case highlights the complexity and high stakes of STOLI-related disputes—and the importance of experienced legal representation.
What Should You Do If a Claim Involves a STOLI Dispute?
If you’re the beneficiary of a life insurance policy and the insurer is denying payment on the grounds that the policy constitutes a STOLI contract, take these steps immediately:
Request a full written explanation of the denial
Gather all documents related to the policy application, ownership transfers, and payment history
Do not attempt to resolve the issue without legal advice—insurers will have teams of attorneys fighting to avoid paying
Consult a life insurance attorney with experience handling STOLI disputes and claim denials
These cases can involve complex laws, multi-jurisdictional issues, and massive financial stakes. Having the right legal team on your side can make all the difference.
Our Firm Fights—and Wins—STOLI Disputes
At our firm, we specialize in fighting wrongful life insurance claim denials, including cases involving STOLI disputes, insurable interest violations, and fraud allegations. We know how insurers operate and how to challenge their tactics effectively.
If your claim has been denied due to a STOLI allegation or you suspect a STOLI scheme is involved, contact us today for a free consultation. We’ll review your case, explain your rights, and take aggressive steps to secure the payout your loved one intended for you.