Stranger-Oriented Life Insurance (STOLI) Policies
What is a STOLI?
STOLI refers to the sale of a life insurance policy to a third party. The owner of the life insurance policy sells the policy for an immediate cash benefit. The buyer becomes the new owner of the life insurance policy, pays future premiums, and collects the death benefit when the insured dies.
At one time, most STOLIs were sold by people with a life-threatening illness. Now, it is often promoted to individuals between the ages of 65 and 85 not facing a health crisis who may sell their life insurance policies to get cash. In many cases the purchase of the policy is for the sole purpose of selling the policy to a third party, immediately or in the future.
Consider your options
If you’re selling your policy to get cash to pay expenses, check out all of your options. You may find a way to get more cash from your life insurance policy.
Ask your insurance agent or company if you have any cash value in your life insurance policy. You may be able to use some of the cash value to meet your immediate needs and keep your policy in force for your beneficiaries. You may also be able to use the cash value as security for a loan from a financial institution.
Find out if your life insurance policy has an accelerated death benefit. An accelerated death benefit typically pays some of the policy’s death benefit before the insured dies. It may be a way for you to get cash from a policy without selling it to a third party.
Selling your life insurance policy may affect your eligibility to purchase another. Be sure that you will not need or want more life insurance in the future.
- Find out the tax implications. Not all proceeds received from the sale of your life insurance policy are tax free.
- It’s important to know that any of your creditors could claim your cash settlement.
- Find out if you will lose any public assistance benefits such as food stamps or Medicaid if you get a cash settlement.
- The buyer of your policy can periodically ask you about your health status. The buyer is required to give you a privacy notice outlining who will get this personal information. Be sure to read it.
- Your policy may be resold to another investor who may also receive your personal information and contact you regarding your health.
- Find out if you have the right to change your mind about the settlement AFTER you get the money. If so, how many days do you have to reconsider and return the money?
Questions to ask
- Do I still need life insurance protection?
- Should I notify my adult children or other previously named beneficiaries that I no longer have this insurance?
- If I sell my policy, how do they decide how much cash I get?
- Is this an employer or other group policy? If so, do I need permission to sell it?
- If I sell my policy, who will be the legal owner?
- Do I need the advice of a tax or estate planning advisor before I decide to sell my policy?
- Who will have specific information about me, my family or my health status?