What is the Purpose of Stranger Originated Life Insurance (STOLI)?

Stranger originated life insurance (STOLI) is a unique type of life insurance where an individual, known as the insured, purchases a policy on the life of another person they do not know, known as the stranger. This arrangement can provide financial security for the insured’s loved ones if the stranger passes away during the policy term.

Purpose of STOLI

• Financial protection: STOLI provides a death benefit to the insured’s beneficiaries in the event of the stranger’s death, ensuring financial security.
• Investment opportunity: STOLI can also be seen as an investment, as the policy’s value typically increases over time.
• Estate planning: STOLI can be used as part of an estate plan to transfer wealth to future generations.

Benefits of STOLI

• Higher coverage amounts: STOLI often allows for larger death benefits than traditional life insurance policies.
• Lower premiums: The insured typically pays lower premiums compared to a policy on their own life due to the stranger’s assumed better health and lower risk.
• No relationship required: The insured does not need to have a relationship with the stranger, making it a convenient option for those looking to provide financial support.

How STOLI Works

The insured purchases a life insurance policy on the life of the stranger. The policy’s premiums are paid by the insured until the stranger’s death or the end of the policy term. In the event of the stranger’s death, the insured receives the death benefit, which is typically paid out tax-free to the beneficiaries.

Eligibility for STOLI

Eligibility for STOLI varies depending on the insurer. However, general requirements include:

• Legal age (typically 18 or 21)
• Good financial standing
• Insurable interest in the stranger (e.g., a financial stake or a valid reason for providing support)

Conclusion

Stranger originated life insurance (STOLI) provides a unique way to secure financial protection for loved ones while also offering investment potential. It can be a valuable tool for estate planning and providing peace of mind in the event of an unforeseen circumstance. If you are considering STOLI, it is important to consult with a qualified insurance professional to determine if it is the right choice for your individual needs.

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