Are Stranger Oriented Life Insurance Policies Legitimate?

In this article...
  • Stranger oriented life insurance policies are a fraudulent attempt to benefit from someone's death. Learn how this scheme works and why it isn't legal.

Stranger-originated life insurance (SOLI) means that a third party purchases a life insurance policy for someone other than a family member. Sometimes, this third party is an investor hoping to profit from the policy, effectively gambling on someone's possible death. SOLI policies are illegal since they require the purchaser to conceal information from the insurance company and constitute fraud, but these schemes still sometimes occur.

What Does Stranger-Originated Life Insurance Mean?

With this arrangement, a stranger buys a life insurance policy for someone they don't know, typically an older adult. The policyholder pays the premiums, even though they have no insurable interest in the person named on the policy. Insurable interest means that someone would experience financial loss as a result of another person's death.

A SOLI scheme pays off if the senior lives past the period during which the insurance company would contest their death but dies within a few months or years thereafter. At this point, the stranger can collect the policy payout. Sometimes, insurance agents or the person named in the policy also participate in the fraud in exchange for a cash payment or substantial commission.

When Can You Buy Life Insurance on Another Person?

Life insurance can shield you or your family from the financial fallout of losing someone close to you. You can legally buy a life insurance policy that covers a key employee in your business, a current or former spouse, a parent or family member or someone with whom you own a business. However, you must have permission from the person in question and prove to the provider that you have an insurable interest. The insured must also go through the company's underwriting process.

You can also legally sell a life insurance policy to someone else. This is an arrangement called a viatical settlement, where brokers purchase policies from terminally ill or elderly individuals, so they can get the cash benefit when that person dies. Usually, this transaction comes with excessive fees and taxes. 

What Is the History of Stranger-Originated Life Insurance?

Stranger-originated life insurance, also called stranger-owned life insurance, was first recorded in the 1700s when limited insurance and medical regulation made it easier to get away with this type of fraud. In fact, the U.S. Supreme Court didn't prohibit SOLI until 1881. Several states also passed laws against the practice when it became briefly popular again in the early 2000s.

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