What does STOLI stand for in the context of life insurance?

STOLI stands for Stranger-Owned Life Insurance, which refers to a scenario where a life insurance policy is taken out on the life of an individual by someone who has no insurable interest in that person. Typically, this involves investors or third parties who capitalize on the death benefit of the policy. STOLI transactions can raise ethical and legal concerns since they often focus on profiting from an individual's death rather than providing the intended security and benefits of life insurance for family members or dependents.

In understanding STOLI, it is essential to recognize that legitimate life insurance practices require an insurable interest — meaning the policyholder should have a legitimate reason to insure the life of the insured. This framework helps to prevent potential abuses and ensures that life insurance remains a product designed for protection and security rather than mere investment or speculative purposes.