Stranger-Originated Life Insurance (STOLI): Controversy and Proposal for Market-Based Solutions

A Stranger-Originated Life Insurance (STOLI) transaction arises when a life insurance policy is effectively procured by a stranger, usually a third-party investor unrelated to the insured. Despite the growing frequency and popularity of STOLI transactions, there has been much discussion, but a lack of academic research, on the issues and challenges they have generated. The purpose of this research is to shed some light on this innovative insurance transaction by providing a clearer understanding of the controversy created by the STOLI phenomenon, and to argue that regulatory action aimed at restricting or prohibiting these transactions seems unnecessary. After examining the controversy generated by STOLI transactions from the perspective of consumers, insurance carriers, and state insurance regulators, we review the primary initiatives to regulate STOLI transactions, analyze the concerns that have been raised about these transactions, and conclude with proposals for market-based solutions and other reforms to address these concerns and other issues that have given rise to the STOLI controversy.